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HC 1531 Published on 20 December 2011

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House of Commons

Committee of Public Accounts

HM Revenue & Customs 2010–11 Accounts: tax disputes

Sixty-first Report of Session 2010–12

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 14 December 2011

Committee of Public Accounts The Committee of Public Accounts is appointed by the House of Commons to examine ‘‘the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit’’ (Standing Order No 148). Current membership Rt Hon Margaret Hodge (Labour, Barking) (Chair) Mr Richard Bacon (Conservative, South Norfolk) Mr Stephen Barclay (Conservative, North East Cambridgeshire) Jackie Doyle-Price (Conservative, Thurrock) Matthew Hancock (Conservative, West Suffolk) Chris Heaton-Harris (Conservative, Daventry) Meg Hillier (Labour, Hackney South and Shoreditch) Joseph Johnson (Conservative, Orpington) Fiona Mactaggart (Labour, Slough) Mr Austin Mitchell (Labour, Great Grimsby) Nick Smith (Labour, Blaenau Gwent) Ian Swales (Liberal Democrats, Redcar) James Wharton (Conservative, Stockton South) The following Members were also Members of the committee during the parliament: Dr Stella Creasy (Labour/Cooperative, Walthamstow) Justine Greening (Conservative, Putney) Eric Joyce (Labour, Falkirk) Rt Hon Mrs Anne McGuire (Labour, Stirling) Powers The powers of the Committee are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/pac. A list of Reports of the Committee in the present Parliament is at the back of this volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee is Philip Aylett (Clerk), Lori Verwaerde (Senior Committee Assistant), Ian Blair and Michelle Garratty (Committee Assistants) and Alex Paterson (Media Officer). Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected].

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Contents

Report Page

Summary 3

Conclusions and recommendations 5

1 HMRC’s processes for settling tax disputes 8

2 Taxpayer confidentiality and lack of transparency 9

3 Inadequate governance arrangements 13

4 Overall leadership of the Department 16

Formal Minutes 18

Witnesses 19

List of printed written evidence 19

List of Reports from the Committee during the current Parliament 20

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Summary

At 31 March 2011 HM Revenue & Customs (the Department) was seeking to resolve tax issues valued at over £25 billion with large companies, some of which included disputes over outstanding tax. The Department must collect as much outstanding tax as possible and be held properly to account for how it resolves tax disputes. We have serious concerns about how the Department handled some cases involving large settlements, where governance arrangements were bypassed or overlooked until it was too late. In some cases the same officials negotiated and approved the settlements, which is clearly unacceptable.

Investigation of these specific cases has led to serious concern about systemic issues which must be addressed with the utmost urgency. There needs to be proper separation between the negotiation of tax settlements and the authorization of such settlements. And the Department must address issues of accountability so that Parliament and the public can be satisfied that best value is secured.

The Department has made matters worse by trying to avoid scrutiny of these settlements and has consistently failed to give straight answers to our questions about specific cases, which has severely hampered our ability to hold it to account for the settlements reached.

The Department has insisted on keeping confidential the details of specific settlements with large companies, even where there have been legitimate concerns about the handling of cases. Details of some cases only reached the public domain because the press secured the details. We recognise the general intention of the legislation is to keep taxpayers’ details confidential, but there is a provision which allows the Commissioners to authorise disclosure in certain circumstances. Furthermore, HMRC has a clear duty to assist Parliament in its work to establish value for money and detailed information can be necessary if Parliament is to properly meet its obligations. Given the public interest in these very large settlements, it is not unreasonable that they should be subject to more specific scrutiny. As it stands, the Department’s decision to withhold details from us reduces transparency and makes it impossible for Parliament to hold Commissioners to account. This situation is entirely unacceptable.

We discovered that the Department’s governance processes for large settlements were not applied consistently. In one case, a mistake was not picked up until too late because the Department failed to follow its own governance procedures. The C&AG told us that this resulted in a loss of up to £8 million in interest forgone. We have since received evidence from a whistleblower that the total value of interest payable in respect of this particular settlement could be as high as £20 million. Our understanding of how this case was settled is inhibited by the imprecise, inconsistent and potentially misleading answers given to us by senior departmental officials, including the Permanent Secretary for Tax. In particular, his evidence to the Treasury Select Committee on his relationship with Goldman Sachs is less than clear given his evidence to us that he facilitated a settlement with the company over their tax dispute. We expect far greater candour from public officials involved in administering such an important area of government, especially when there is a question about whether HMRC acted within the law and within its protocols. We are concerned that whistleblowers using the provisions of the Public Interest Disclosure Act 1998 face

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threats of dismissal for providing important and relevant information.

The Department accepts that its governance arrangements have not provided sufficient assurance and that independent scrutiny of large settlements is needed. It has appointed two new Commissioners with tax expertise, and plans to introduce a new assessor role to permit independent review of large settlements before they are finalised. The Cabinet Secretary assured us that proposals would be submitted to the Public Accounts Committee by Christmas. We welcome these measures, but they will not by themselves guarantee proper accountability. In future, the Department needs to ensure it follows its own governance procedures and checks without exception. In particular, it needs to make sure that in all cases there is a clear separation between the roles of those negotiating and those signing off settlements.

We saw little evidence of a culture of personal accountability within the Department. We were told that on individual was held accountable for the mistake which led to a loss of the interest due to the Department. However, those at the top of the Department also need to take responsibility for how the overall system has been designed and operated, since that is the context in which mistakes have occurred.

We have serious concerns that large companies are treated more favourably by the Department than other taxpayers. We were told by the Cabinet Secretary that the relationship management approach adopted for large companies had been very successful in terms of tax collection. But for the public to have confidence in this approach, the Department’s working practices must be seen to be absolutely impartial. The Department has left itself open to suspicion that its relationships with large companies are too cosy. We are also concerned that large companies appear to receive preferential treatment compared to small businesses and individuals – for example, in settling the totals due at less than the sum claimed by HMRC and in the time they are allowed to pay their tax liabilities without incurring interest charges. In order to maintain public confidence, the Department must ensure it avoids any perception of undue leniency in its dealings with large companies and must be seen to treat every taxpayer equally before the law.

We welcome the Comptroller and Auditor General’s proposal to conduct further work to consider the reasonableness of the settlements reached in the specific cases where normal governance processes were not followed, and to report on whether proper legal advice was secured in a timely manner and that HMRC complied with its own published procedures and protocols. The Department has agreed to co-operate fully with this inquiry and with any subsequent hearings we hold.

On the basis of a Report by the Comptroller and Auditor General, we took evidence from the Cabinet Secretary and HM Revenue & Customs on tax disputes.1

1 C&AG’s Report, Report by the Comptroller and Auditor General on HM Revenue & Customs’ 2010-11 Accounts, HC

981, Session 2010-12

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Conclusions and recommendations

1. The Department’s refusal to disclose taxpayer information prevents proper scrutiny of the process for reaching tax settlements with large companies. We accept there is a need for confidentiality to protect taxpayers, but this must not be used as a cloak to protect the Department from scrutiny. It is absurd that we have been forced to rely on information in the media to find out about cases that raise concerns, and of course we only know about cases on which information has been published in the media. The Department was not able to point to an absolute statutory bar on disclosure of information about specific cases. Its withholding of information is in fact a policy decision taken by Commissioners. This approach fails to give proper regard to HMRC’s duty to assist the Public Accounts Committee in examining whether or not the Department is giving best value for money. There is less justification for keeping tax information about large corporations confidential than information about individuals. The Department must set out in greater detail its policy reasons for not disclosing information about specific corporate taxpayers. It must explain the circumstances in which it would consider disclosure and it must set out how it will fulfil its statutory obligations to account for its actions to Parliament.

2. The evidence of the Department’s senior officials fails to give us any confidence in the way large settlements are reached. The Permanent Secretary for Tax and the Department’s General Counsel and Solicitor failed to answer our questions about specific cases in a spirit of openness. Some of the evidence they provided about the exact order of events, the extent of the Permanent Secretary for Tax’s personal involvement in negotiations and whether legal advice was sought and acted upon was imprecise, inconsistent and potentially misleading. Furthermore, the Permanent Secretary for Tax was less than clear and consistent in the evidence he first gave to the Treasury Select Committee and then to the Public Accounts Committee. Accounting Officers are accountable to this Committee and we expect precise, open and comprehensive answers to our questions. Any failure to do so is a failure to perform a core responsibility and should be treated as such by the Cabinet Secretary.

3. The Department chose to depart from normal governance procedures in several cases, which allowed Commissioners to sign off on settlements that they themselves negotiated. HMRC execute hugely important functions on behalf of the taxpayer and the Government. It is absolutely necessary that the officials responsible for and engaged in this work should have the necessary skills, qualifications and experience to fulfil these vital roles. For four of the largest settlements examined by the Comptroller and Auditor General, the processes applied did not recognise the importance of clear separation between those negotiating and those approving settlements, and we are not convinced of the soundness of decisions made by Commissioners in these cases. The Department has since put in place new governance arrangements that seek to separate the negotiation and authorisation roles. The recent appointment of two new Commissioners widens the pool of Commissioners who have the expertise to make an informed judgement in signing off settlements. However, this does not in itself guarantee there will be effective separation of roles or proper accountability for decisions reached, not least because

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the two new Commissioners are existing members of the Department’s senior team. The Department must ensure that its revised procedures to separate out the roles of those involved in settling tax disputes are applied to all cases without exception. The Department should report back to us, as promised by the Cabinet Secretary, before Christmas.

4. Governance procedures have lacked the independence and transparency needed to provide sufficient assurance to Parliament. Tax settlements with large companies are inevitably complex and involve the exercise of judgement. Parliament needs assurance that these settlements are appropriate and good value for the taxpayer. We welcome the Department’s proposals to introduce an independent assessor, or assessors, to sit alongside Commissioners, who would carry out independent review of settlement proposals. Appropriate rules need to be established which will ensure that all settlements over £100m are assessed independently and that a random sample of those over £10m are assessed independency each year. It is important that the new role is demonstrably independent and increases accountability to Parliament, and should be established in statute. For speed, we accept that the role should be set up in shadow form, but it should be formalised in legislation as quickly as possible. Independent assessors should report annually to Parliament on their work, perhaps in a statement contained in the Department’s annual report and accounts. This should include aggregate information on the cases in which they were involved and a report on any settlements where they have identified concerns.

5. The Department’s failure to comply with its own processes resulted in a substantial amount of money being lost to the Exchequer. In one case, a mistake was not picked up until too late because the Department failed to follow its own governance procedures. The C&AG told us that this resulted in a loss of up to £8 million in interest forgone. We have since received evidence from a whistleblower that the total value of interest payable in respect of this particular settlement could be as high as £20 million. When the error was eventually picked up, the Department decided it would not reopen negotiations. We are astonished that in this case the decision to settle was taken without legal advice and that the Department did not even take the most basic step of making its own note of meetings with the company concerned, relying instead on the record kept by the company. The Department must ensure that it has applied all relevant governance checks to each settlement before finalising them with taxpayers. It must also consult legal advisors before settling cases in litigation and make sure it keeps its own accurate and complete records of key meetings with companies. We remain concerned that the decision was taken not to reopen this case when the ‘mistake’ was uncovered, and we were not given good reasons for HMRC not reopening this case.

6. Those at the top of the Department have not taken personal responsibility for serious errors. The failure to apply proper governance processes is the latest in a series of errors made by the Department in recent years, including the debacle over PAYE and tax credits. There appears to be little or no sense of personal accountability when things go wrong. It is right that an individual was held accountable for his role in the mistake that led to the loss of interest on a tax liability, but there also needs to be stringent accountability at the top of the Department for

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designing and operating a system in which such mistakes could occur. We expect leaders to take responsibility for both systemic issues and for specific mistakes, for which they are accountable.

7. The Department has left itself open to suspicion that its relationships with large companies are too cosy. The Permanent Secretary for Tax attended a significant number of informal meetings over lunch and dinner with large companies with whom HMRC was settling complex tax disputes, when formal HMRC minutes were not necessarily taken. We were told this was part of the Department’s overall approach to relationship management. We accept that senior tax officials need to be accessible to major stakeholders and we welcome the fact that details of hospitality are published, but this information is only meaningful if supported by transparency about the Permanent Secretary for Tax’s involvement in settling disputes with these companies. It appears that when deciding whether or not to accept hospitality, not enough attention was paid to the risk that a conflict of interest might be perceived. The Department must exercise better judgement over how it manages its relationships with large companies, to ensure it avoids the perception of conflicts of interest.

8. The Department is not being even handed in its treatment of taxpayers. It is unfair that large companies can settle their tax disputes with the advice of professionals at less than the full amount due and that they have been allowed up to 10 years to pay their tax liabilities, while small businesses and individuals on tax credits are not allowed similar leeway. The Department has promised to look into the treatment of these groups of taxpayers in terms of its fairness and reasonableness. It should report back to us on any actions taken to address the wider policy or process issues identified as a result of its examination.

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1 HMRC’s processes for settling tax disputes 1. Tax disputes between HM Revenue & Customs (the Department) and large companies are a consequence of the complex and international nature of modern business. Disputes can arise about the facts of a particular case, about the interpretation and application of tax law, and about the legitimacy of tax avoidance schemes. At 31 March 2011, the Department was seeking to resolve over 2,700 issues with the biggest companies, including disputes over outstanding tax, with potential tax at stake of £25.5 billion.2

2. HM Revenue & Customs is a non-ministerial department. It has this status to ensure that the administration of the tax system is fair and impartial and that Ministers have no involvement in individual taxpayers’ affairs. The Department’s Commissioners are appointed by the Queen to exercise certain functions on behalf of the Crown, as set out in the Commissioners for Revenue and Customs Act 2005. The Commissioners are all senior executives of the Department. They have ultimate responsibility for collecting and managing tax revenues, and for providing leadership to the Department, managing its resources and delivering the objectives set by the Chancellor of the Exchequer. The Department’s Corporate Governance Report states that the Commissioners are directly accountable to HM Treasury Ministers and Parliament.3

3. When a dispute over the amount of tax due arises, the Commissioners can either settle the dispute by agreement or litigate. In 2007 the Department published its Litigation and Settlement Strategy, which sets out its framework for concluding tax disputes and guidance on acceptable settlement terms. The Strategy was introduced to bring greater consistency to the way the Department resolves disputes. It states that, in cases where there are a range of feasible outcomes, settlement must be for an amount not less than the Department would reasonably expect to get from litigation.4

4. The Department launched its High Risk Corporates Programme (the Programme) in 2006 to improve its relationships with large businesses and discourage aggressive tax avoidance behaviour on their part.5 The Programme is overseen by a Programme Board chaired by the Director of the Department’s Large Business Service and consisting of senior departmental staff below Commissioner level.6 All cases in which the total tax under consideration exceeds £100 million or which are particularly sensitive have to be approved by the Programme Board before settlement is agreed with the company concerned. If the Programme Board cannot reach a consensus, or if the tax under consideration exceeds £250 million or the issues involved are exceptionally sensitive, the settlement must also be signed off by two Commissioners.7

2 C&AG’s Report, paras 2.1-2.2

3 HM Revenue & Customs, Annual Report and Accounts 2010-11, HC 981, Session 2010-12, p 59

4 C&AG’s Report, paras 2.10-2.11

5 C&AG’s Report, para 2.13

6 C&AG’s Report, para 2.15 and Figure 7

7 Ev 68; C&AG’s Report, paras 2.17-2.19

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2 Taxpayer confidentiality and lack of transparency 5. The Department’s rationale for not disclosing information about tax settlements is the need for confidentiality to protect the interests of taxpayers. The Department claims that it is prevented from disclosing information about individual taxpayers under the Commissioners for Revenue and Customs Act 2005 (the 2005 Act).8 Section 18(1) of the Act prohibits the disclosure of information, and criminal penalties for unlawful disclosure are contained in section 19. However, exceptions to this general prohibition are set out in section 18(2).

6. Section 18(2)(a) of the 2005 Act permits disclosure of information which “is made for the purposes of a function of the Revenue and Customs”. One of the Department’s functions is to assist Parliament, as the Permanent Secretary for Tax recognised in his evidence to us.9 However, the Department’s view is that this does not permit providing information to a select committee which would identify a specific taxpayer. The Department has cited a number of policy and operational reasons which it believes support its decision not to release information identifying taxpayers. These include: the potentially damaging effects on voluntary compliance by taxpayers; potentially harmful effects on Ministers and the Department’s relationship with other departments and agencies; the possible impact on the Department’s reputation for impartiality; and the risk of exposing officials to criminal sanctions.10

7. The 2005 Act does not provide an absolute bar to information disclosure and it is therefore the Department’s particular interpretation of the legislation that has prevented it from being more open about specific cases. Commissioners have the power to disclose information at their discretion, and in doing so will have regard to the considerations set out above.11 However, these are policy not legal reasons for maintaining confidentiality.12 It is essential that when balancing the case for and against disclosure of taxpayer information, the Department gives due weight to the wider public interest, and in particular its duty to provide Parliament with the necessary assurance that the Department and Commissioners have acted appropriately when reaching settlements. The Department also needs to distinguish between different types of taxpayers in considering whether to disclose information, as the impact on an individual taxpayer or family will be different to the impact on a large corporation.13

8. The Department’s General Counsel and Solicitor also claimed he could not discuss a particular case because of legal privilege, as a judicial review of the case was pending.14

8 Q 49

9 Q 58; Ev 65

10 Ev 65

11 Qq 48-49, 60; Ev 65

12 Qq 517-519

13 Qq 723-724

14 Qq 479-484

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However, he conceded there were no proceedings yet before the courts.15 Erskine May stipulates that the sub judice rule applies only where there are court proceedings, so this is not a valid reason for declining to answer our questions.16

9. We are particularly uneasy about the blanket confidentiality applied to cases raising governance concerns or where mistakes were made in reaching settlements, because we are unable to scrutinise what went wrong in these cases. Details of some of these cases only came to our attention because they appeared in the media. It is deplorable that we received more information from the media and from a whistleblower than from the Department itself.17

10. The Permanent Secretary for Tax and other senior officials repeatedly cited taxpayer confidentiality and legal privilege to justify not answering our questions about specific cases. In one case, we sought information on the details of a settlement in which an error had been made with the effect that the company concerned did not have to pay interest due on its tax liability. The C&AG told us that this resulted in a loss of up to £8 million in interest forgone. We have since received evidence from a whistleblower that the total value of interest payable in respect of this particular settlement could be as high as £20 million. The Department cited taxpayer confidentiality as the reason for refusing to answer our questions about this error:

• The Permanent Secretary for Tax declined several times to answer questions about the extent of the interest lost on the settlement;18 and the General Counsel and Solicitor said he could not comment on the settlement sum reached even though some particulars of the claim were in the public domain because, before the settlement was reached, the case was the subject of public proceedings in the county court.19

• The Permanent Secretary for Tax declined on several occasions to explain why he had not reopened the case in order to pursue the interest on the tax liability after the mistake was discovered, despite advice from the General Counsel and Solicitor that it would have been possible to reopen the case.20

• The Permanent Secretary for Tax said he could not confirm whether the Department warned the company it would be liable for interest if it continued to resist settling the dispute.21

• The General Counsel and Solicitor claimed he could not answer a question on whether he believed there was any impediment to charging interest on the tax

15 Qq 479-484

16 Q 486; Erskine May, 24th edition, London, 2011, pp 441-3

17 Q 45

18 Qq 25-28, 43-44

19 Qq 529-532

20 Qq 126, 545-547

21 Q 33

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liability.22 However, later in the same hearing the Permanent Secretary for Tax confirmed that there was no such legal impediment.23

• The Permanent Secretary for Tax said he could not clarify whether the case was one of the four large tax cases where the Department did not follow its normal governance arrangements.24

11. We also asked about another case, where the Department concluded a tax settlement of £1.25 billion with another large company, and again the Department cited taxpayer confidentiality as the reason for refusing to answer our questions. In particular:

• The General Counsel and Solicitor said he could not comment on whether lawyers had advised that £1.25 billion was the correct settlement amount or whether the settlement included interest.25

• The Permanent Secretary for Tax chose not to answer questions on why the company had been given five years to settle its tax liability without being charged interest, despite this information being put in the public domain by the company itself.26

12. Notwithstanding the debate about confidentiality, it is essential that we are given clear and complete evidence to questions arising from the way the Department discharges its responsibilities. The weaknesses in the evidence provided by the Department extended beyond matters relating specifically to the taxpayer concerned. The Department was also inconsistent in its presentation of its own internal discussions where no confidentiality constraint could conceivably apply:

• The Permanent Secretary for Tax maintained several times that he did not deal with the company’s tax affairs, despite acknowledging that he attended the key meeting with the company where the settlement was reached on 19 November 2010.27

• The Permanent Secretary for Tax gave unclear and potentially misleading evidence at our 17 October 2011 hearing on the chronology of events leading to the discovery and reporting of the mistake and the timing of subsequent discussions he had with the General Counsel and Solicitor. He omitted to say exactly when he had informed the General Counsel and Solicitor about the mistake leading to loss of interest due to the Department, despite our specific questioning on when the mistake was identified and reported.28

22 Q 631

23 Q 710

24 Qq 83, 91

25 Qq 583-589

26 Qq 233-234

27 Qq 1-7, 37-39

28 Qq 261-263

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In a subsequent hearing, the General Counsel and Solicitor said the Permanent Secretary for Tax had spoken to him shortly after the 19 November meeting, but also confirmed that he was not explicitly told about the mistake until 7 December.29 The Permanent Secretary for Tax confirmed later in the same hearing that he had spoken to the General Counsel and Solicitor in the week of 22 November to inform him that the case had been settled, and then admitted he had not mentioned the mistake involving the loss of interest until 7 December.30

• When asked if there was a note of the 19 November meeting, the Permanent Secretary for Tax initially said he did not know.31 In subsequent hearings he clarified that a meeting record had been prepared by the company, which the Department considered to be a fair reflection of what took place.32 However, he still could not confirm whether the Department had prepared its own note of this meeting.33

• The Permanent Secretary for Tax provided inconsistent evidence on whether anyone within the Department had been held accountable for the mistake. At the hearing on 12 October 2011, he said that no disciplinary action had been taken against anybody as a result of the mistake.34 However, in a later hearing he said that the error had been taken into account in someone’s annual appraisal and implied that the individual concerned did not receive a bonus that year.35

29 Qq 559-560

30 Qq 722-725

31 Qq 14, 17-19

32 Qq 260, 713

33 Qq 257-261; Qq 729-733

34 Qq 113, 118

35 Qq 703-705

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3 Inadequate governance arrangements 13. In four of the largest tax settlements examined by the Comptroller and Auditor General, the Department decided not to apply normal governance arrangements and operated “bespoke” governance arrangements instead.36 In three of these cases, there was no proper separation between the negotiation and approval of the settlement because one or both of the Commissioners signing off the settlement had also been involved in the negotiations.37 In the case where an error was made leading to the loss of interest due on the settlement, the Permanent Secretary for Tax was one of the Commissioners who approved the settlement despite being involved in reaching the settlement.38

14. The C&AG is undertaking further work to examine the reasonableness of some of the larger settlements. This will cover the settlements where the Department’s governance arrangements did not provide adequate assurance, including those cases where the Commissioners who signed off the settlement also participated in the negotiations. Where necessary, the C&AG will commission expert tax advice. He has undertaken to report the results of this work to us in a private, confidential session. The Department has agreed to support the C&AG’s work and to provide answers to our questions on these cases in the confidential session.39

15. The Permanent Secretary for Tax has already accepted that bypassing normal governance arrangements resulted in a lack of objective assurance about the settlements reached.40 The Department has promised it will not set up bespoke governance arrangements in future, given the concerns raised by the four cases.41 The Department has also put in place new governance arrangements, which require the two Commissioners formally approving a settlement to have had no role in negotiating that settlement. The new arrangements are designed to ensure that, for the cases where a Commissioner is involved in the negotiation process, there is a clear separation of roles between those involved in reaching settlements and those authorising them.42

16. We were astonished to learn that the Permanent Secretary for Tax was the only Commissioner with “deep” tax knowledge.43 This makes it difficult to see how sign-off by the other three Commissioners could have been an informed and effective check on large settlements.44 We welcome the appointment of two new Commissioners, one of whom is a tax professional and has extensive tax knowledge.45 This starts to widen the pool of Commissioners with the expertise to make an informed judgement on settlement

36 Qq 83-86, 137; C&AG’s Report, para 11

37 Q 165

38 Qq 79-82

39 Q 230

40 Q 152

41 Ev 68

42 Qq 144-145, 148, 665-667; Ev 68

43 Q 157

44 Q 159

45 Qq 166-168

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proposals, but is not sufficient to secure that there is always proper separation between the negotiation and approval of settlements.. However, the Department must make sure that procedures to separate these roles are applied to every case without exception, in order to provide the necessary degree of assurance over the settlements reached.

17. We have residual concerns about the absence of real independence in the Department’s governance arrangements. Commissioners are not able to provide completely independent oversight of settlements because they are senior executives responsible for running the Department, including the design and operation of processes for resolving disputes.46 Similarly, the members of the High Risk Corporates Programme Board, who exercise another important governance check, are all staff members of the Department and so cannot provide entirely independent assurance.47

18. The proposal to appoint an assessor or assessors from outside the Department to provide independent review of large settlements could provide the important external assurance that is currently missing.48 However, this assurance can only be delivered if the role is set up to be demonstrably independent of the Department. The assessor role should be established by primary legislation to guarantee its statutory independence.49 However, we are also keen that the role be created as quickly as possible. There are precedents for a two-stage process that the Department should explore, setting the function up in shadow form first with legislation following as soon as the parliamentary timetable allows.50

19. The independent assessor role has the potential to increase the Department’s accountability to Parliament. Appropriate arrangements need to be agreed so that all settlements over £100m are independently assessed, and a random sample of settlements below £100m are regularly assessed independently each year. The assessors should be required to report on their work to Parliament, which could be done through providing an account of their activities in the Department’s annual report and accounts laid before Parliament.51 This should summarise their work for the year and include aggregate information on the number and value of cases reviewed and the results of their examination of cases. The assessors should also report by exception on any settlements where they have identified concerns.

20. The importance of following established governance procedures is well illustrated by the case which resulted in a loss of interest. The C&AG told us this resulted in a loss of up to £8 million, although evidence we subsequently received from a whistle-blower suggests it could be as high as £20 million.52 The Department has admitted that its failure to charge interest on the liability was a mistake.53 It also admitted that the failure to fully apply its

46 Q 662

47 Qq 228,

48 Q 667

49 Q 679

50 Qq 674-675

51 Qq 698-699

52 Q 121

53 Qq 22, 27

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own governance procedures in this case was a further mistake.54 The case should have been referred to the Programme Board before settlement was agreed with the company, but this was only done after the settlement had been negotiated with the taxpayer.55 When the Programme Board did eventually consider the case, it rejected the settlement that had been reached because of the failure to claim interest and then referred the case to Commissioners for their consideration.56

21. Having discovered the financial mistake, the Permanent Secretary for Tax sought advice from the General Counsel and Solicitor on the courses of action open to the Department. The advice received was that the Department had two options: it could revisit the settlement, or simply accept that a mistake had been made and not pursue the interest owed.57 The General Counsel and Solicitor told us that as part of his advice, he had expressed a personal preference for not reopening the settlement.58 The Permanent Secretary for Tax accepted this advice and did not reopen the settlement.59 As set out in the previous section of this Report, we were unable to secure answers to our questions as to why this course of action was followed, and we remain concerned that value for money was therefore not secured for the taxpayer.60

22. This case highlighted significant shortcomings in the Department’s procedures for reaching settlements of tax disputes. The team negotiating the case failed to consult the lawyers involved in litigating the case before they concluded the settlement.61 As the General Counsel and Solicitor himself acknowledged, it would be normal practice for the team negotiating a settlement to have consulted the litigating lawyers, and they should have done so in this case.62

23. The Department did not produce a written note of the 19 November 2010 meeting with the company, despite the fact that this was the meeting where the settlement of the dispute was reached.63 Instead, the Department relied upon a note produced by the company itself.64 It is astonishing that the Department neglected to make its own record of such an important meeting. It is even more astonishing that the Permanent Secretary for Tax did not even know whether a note existed or not.65

54 Qq 719, 728

55 Qq 719, 723

56 Q 724

57 Qq 266, 542,545

58 Qq 602-605

59 Qq 714-715

60 Qq 126, 269, 734

61 Qq 250, 548-550

62 Qq 549-550

63 Qq 740-743

64 Qq 713, 741,743

65 Qq 17-19, 740-742

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4 Overall leadership of the Department 24. There is little evidence within the Department of personal responsibility being taken for serious errors. The Permanent Secretary for Tax initially told us that no disciplinary action had been taken against anybody for the mistake in the settlement that led to a loss in interest due to the Department.66 In a later hearing, he eventually disclosed that a review had been undertaken by the head of the Department’s Large Business Service. This resulted in the error being taken into account in the relevant officer’s annual appraisal, and no bonus was paid to that individual that year.67 However, it was not clear that the senior staff who designed, operated and oversaw the system in which the mistake was made were held accountable in the same way.68 When asked if he had considered his own position, the Permanent Secretary for Tax said he had no plans to resign.69

25. The Permanent Secretary for Tax did assure us that the Department had learned from its mistakes and, in relation to the case where the error involving interest was made, he claimed: “we have made sure that a mistake like that cannot be made again”.70 Nevertheless, he was unable to give us an exact answer on the scale of mistakes made by the Department each year and did not explain how he expected managers to ensure their staff learn from mistakes when they are made.71

26. We are concerned about the perception that the Department has an unduly cosy relationship with large companies it is trying to settle tax disputes with. The Permanent Secretary for Tax has had a significant number of lunches and dinners with companies, tax lawyers and tax advisers – as many as 107 such engagements in two years.72 The publication of details of hospitality received from companies is a welcome transparency measure, but would only be meaningful if supported by information about the extent to which the Permanent Secretary for Tax is also involved in negotiations with, or decisions affecting, those companies.73

27. The Permanent Secretary for Tax assured us that he does not have lunch or dinner with companies that he is negotiating with, but conceded that: “I find other ways of doing things…maybe a cup of coffee in my office”.74 The absence of full transparency about his relations with companies risks the perception that he has acted improperly or exercised poor judgement.75

66 Q 113

67 Qq 701-705

68 Qq 154-156

69 Q 751

70 Qq 111-112

71 Qq 117-118

72 Q 192

73 Q 713

74 Qq 190, 194-195

75 Qq 71-72, 190, 193-194, 717

17

28. The Department appears to be showing large companies greater leniency in the time it is allowing them to pay their tax liabilities. We heard that large companies have been given up to 10 years to pay their liabilities.76 In contrast, other taxpayers such as small businesses and individuals on tax credits are not permitted a similar amount of time to pay what they owe.77 This sort of inconsistency raises significant misgivings about whether the Department is treating different groups of taxpayers fairly and reasonably.78

76 Q 214

77 Qq 723-725

78 Qq 220, 223-226, 723-727

18

Formal Minutes

Wednesday 14 December 2011

Rt Hon Margaret Hodge, in the Chair

Mr Richard Bacon Stephen Barclay Jackie Doyle-Price Matthew Hancock Chris Heaton-Harris Meg Hiller

Jo JohnsonFiona Mactaggart Austin Mitchell Nick Smith Ian Swales

Draft Report (HMRC – Tax Disputes) proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 16 read and agreed to.

Conclusions and recommendations 1 to 5 read and agreed to.

Summary read and agreed to.

Resolved, That the Report be the Sixty First Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for placing in the Library and Parliamentary Archives.

[Adjourned till Monday 16 January at 3.00pm

19

Witnesses

Wednesday 12 October 2011

Dave Hartnett CB, Permanent Secretary for Tax, Stephen Banyard CBE, Acting Director General for Personal Tax and Simon Bowles, Chief Finance Officer, HM Revenue and Customs

Ev 1

Monday 17 October 2011

Dave Hartnett CB, Permanent Secretary for Tax, John Keelty, Director, Finance, Planning and Performance, HM Revenue and Customs Ev 19

Monday 7 November 2011

Anthony Inglese, General Counsel and Solicitor, HM Revenue and Customs Ev 39

Dave Hartnett CB, Permanent Secretary for Tax, HM Revenue and Customs, and Sir Gus O’Donnell KCB, Cabinet Secretary, Cabinet Office Ev 52

List of printed written evidence

1 HM Revenue and Customs Ev 65: Ev 67: Ev 68: Ev 70

2 Osita Mba LLB (Hons), BCL (Oxon) Ev 71: Ev 74: Ev 132

20

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2010–12

First Report Support to incapacity benefits claimants through Pathways to Work

HC 404

Second Report

Delivering Multi-Role Tanker Aircraft Capability

HC 425

Third Report

Tackling inequalities in life expectancy in areas with the worst health and deprivation

HC 470

Fourth Report

Progress with VFM savings and lessons for cost reduction programmes

HC 440

Fifth Report

Increasing Passenger Rail Capacity

HC 471

Sixth Report

Cafcass's response to increased demand for its services

HC 439

Seventh Report Funding the development of renewable energy technologies

HC 538

Eighth Report

Customer First Programme: Delivery of Student Finance

HC 424

Ninth Report

Financing PFI projects in the credit crisis and the Treasury’s response

HC 553

Tenth Report

Managing the defence budget and estate

HC 503

Eleventh Report

Community Care Grant

HC 573

Twelfth Report

Central government’s use of consultants and interims

HC 610

Thirteenth Report

Department for International Development’s bilateral support to primary education

HC 594

Fourteenth Report

PFI in Housing and Hospitals

HC 631

Fifteenth Report Educating the next generation of scientists HC 632 Sixteenth Report

Ministry of Justice Financial Management

HC 574

Seventeenth Report

The Academies Programme

HC 552

Eighteenth Report

HM Revenue and Customs’ 2009-10 Accounts

HC 502

Nineteenth Report

M25 Private Finance Contract

HC 651

Twentieth Report

Ofcom: the effectiveness of converged regulation

HC 688

Twenty-First Report

The youth justice system in England and Wales: reducing offending by young people

HC 721

Twenty-second Report

Excess Votes 2009-10

HC 801

Twenty-third Report

The Major Projects Report 2010

HC 687

21

Twenty-fourth Report Delivering the Cancer Reform Strategy HC 667 Twenty-fifth Report

Reducing errors in the benefit system

HC 668

Twenty-sixth Report Management of NHS hospital productivity HC 741 Twenty-seventh Report

HM Revenue and Customs: Managing civil tax investigations

HC 765

Twenty-eighth Report

Accountability for Public Money

HC 740

Twenty-ninth Report

The BBC’s management of its Digital Media Initiative

HC 808

Thirtieth Report

Management of the Typhoon project

HC 860

Thirty-first Report

HM Treasury: The Asset Protection Scheme

HC 785

Thirty-second Report

Maintaining financial stability of UK banks: update on the support schemes

HC 973

Thirty-third Report

National Health Service Landscape Review

HC 764

Thirty-fourth Report

Immigration: the Points Based System – Work Routes

HC 913

Thirty-fifth Report

The procurement of consumables by National Health Service acute and Foundation Trusts

HC 875

Thirty-seventh Report

Departmental Business Planning

HC 650

Thirty-eighth Report

The impact of the 2007-08 changes to public service pensions

HC 833

Thirty-ninth Report

Department for Transport: The InterCity East Coast Passenger Rail Franchise

HC 1035

Fortieth Report

Information and Communications Technology in government

HC 1050

Forty-first Report

Office of Rail Regulation: Regulating Network Rail’s efficiency

HC 1036

Forty-second Report

Getting value for money from the education of 16- to 18-year olds

HC 1116

Forty –third Report

The use of information to manage the defence logistics supply chain

HC 1202

Forty-fourth Report Forty-fifth Report

Lessons from PFI and other projects The National Programme for IT in the NHS: an update on the delivery of detailed care records

HC 1201 HC 1070

Forty-sixth report Forty-seventh Report

Transforming NHS ambulance services Reducing costs in the Department for Work and pensions

HC 1353 HC 1351

Forty-eighth Report Forty-ninth Report Fiftieth Report

Spending reduction in the Foreign and Commonwealth Office The Efficiency and Reform Group’s role in improving public sector value for money The failure of the FiReControl project

HC 1284 HC 1352 HC 1397

22

Fifty-first Report Independent Parliamentary Standards Authority HC 1426 Fifty-second Report

DfID Financial Management

HC 1398

Fifty-third Report

Managing high value capital equipment

HC 1469

Fifty-fourth Report

Protecting Consumers – The system for enforcing consumer law

HC 1468

Fifty-fifth Report

Formula funding of local public services

HC 1502

Fifty-sixth Report

Providing the UK’s Carrier Strike Capability

HC 1427

Fifty-seventh Report

Oversight of user choice and provider competition is care markets

HC 1530

Fifty-eighth Report Fifty-ninth Report

HM Revenue and Customs: PAYE, tax credit debt and cost reduction The cost-effective delivery of an armoured vehicle capability

HC 1565 HC 1444

Sixtieth Report

Achievement of foundation trust status by NHS hospital trusts

HC 1566

Sixty-first Report

HM Revenue and Customs 2010-11 Accounts: tax disputes

HC 1531

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Committee of Public Accounts: Evidence Ev 1

Oral evidenceTaken before the Committee of Public Accounts

on Wednesday 12 October 2011

Members present:

Margaret Hodge (Chair)

Mr Richard BaconStephen BarclayStella CreasyMatthew HancockJoseph Johnson

________________

Amyas Morse, Comptroller and Auditor General, Paul Keane, Director, National Audit Office, JohnThorpe, Director, National Audit Office, Marius Gallaher, Alternate Treasury Officer of Accounts, HM

Treasury were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

HMRC Tax Disputes

Examination of Witnesses

Witnesses: Stephen Banyard CBE, Acting Director General Personal Tax, HM Revenue and Customs, SimonBowles, Chief Finance Officer, HM Revenue and Customs, Dave Hartnett CV, Permanent Secretary for Tax,HM Revenue and Customs, gave evidence.

Chair: Welcome, Mr Hartnett.Dave Hartnett: Good afternoon.

Q1 Chair: We are going to focus this afternoon firston tax disputes, and then we will look at PAYE andtax credits, if we can.I am going to start with a rather tough question: itseems to me that you lied when you told the TreasuryCommittee on 12 September that “I do not deal withGoldman’s tax affairs.” In preparing for thisafternoon, we had access to a note of a meeting on 8December in the offices of your lawyers which statesthat you had settled and, in fact, had “shaken hands”with Goldman Sachs on a deal on its tax affairs.Dave Hartnett: Chair, I did not lie, and I think theHansard extract demonstrates that. I was first askedby Mr Norman whether I had had corporatehospitality from Goldman’s, and I explained that I hadhad supper at Goldman’s to speak to 20 FTSE 100CFOs with one of my managing director colleaguesfrom the Treasury. I went on to say that “I do not dealwith Goldman’s tax affairs.” I met Goldman’s on asingle occasion, on 19 November 2010, when I hadbeen asked by two of my colleagues to assist themwith a difficult relationship issue. I have no deepknowledge of Goldman’s tax affairs. I have neverworked in a normal way, in my understanding, dealingwith their tax affairs on an everyday and routine basis.I have never done that.

Q2 Chair: The minutes of the meeting in AnthonyInglese’s office at 100 Parliament street on 8December 2010 say that “a late submission had comein about a deal on which DH”—you—“had ‘shakenhands’ with GS”, which is Goldman Sachs. Is thata lie?

Austin MitchellNick SmithIan SwalesJames Wharton

Dave Hartnett: Well, I am not going to say it is a lie,and I am certainly not lying.

Q3 Chair: Well, one or other is a lie.Dave Hartnett: No, Chair, I am afraid it is not. I wasat a meeting on 19 November with two of mycolleagues and representatives—

Q4 Chair: Did you do a deal with Goldman Sachs?Dave Hartnett: We reached a settlement—

Q5 Chair: On which you shook hands.Dave Hartnett: I have no recollection—

Q6 Chair: So if you reached a settlement, why didyou say at the Treasury Committee to Jesse Norman,“I do not deal with Goldman’s tax affairs”?Dave Hartnett: Because what I meant by that is I donot deal, as my colleagues deal on a regular basis,with Goldman’s tax affairs. I attended the meetingon 19—

Q7 Chair: This is a big bit of Goldman’s tax affairs,for heaven’s sake! This is a dispute on which youpersonally negotiated the settlement, yet you told theTreasury Committee, “I do not deal with Goldman’stax affairs.”Dave Hartnett: I am very sorry, Chair, but I did notnegotiate the settlement on my own. I went to helpthe resolution of the issues.

Q8 Chair: So the minutes of the meeting withAnthony Inglese, Alan Evans, John Sandford andDean Rowland—all HMRC people, I assume—arenot true.

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Ev 2 Committee of Public Accounts: Evidence

12 October 2011 HMRC and HM Treasury

Dave Hartnett: I am sorry. These are absolute terms.I saw the minute for the first time yesterday. I was notat the meeting. Mr Inglese saw the minute for the firsttime on Monday—of this week.

Q9 Chair: That is laughable. I shall read you moreabout this meeting: “It was not clear whether DH”—you—“had settled on £24m or on whatever theprincipal was. There was discussion about whetherthere could be justification for settling withoutinterest, especially in view of the LitigationStrategy…It was, however, clear that the proposedsettlement gave GS no additional penalty for havingresisted for 5 more years, including as DR”—thatmust be Dean Rowland—“explained raking everyconceivable point in the Tribunal”. At the end of thisminute, it says, “AI”—Anthony Inglese—“said hewould always want to assist DH, but not if this were‘unconscionable’”.Dave Hartnett: Well, I’ve read the minute. I don’tthink that Mr Inglese says in it that anything was“unconscionable”.Chair: It is pretty clear that that is what they all felt.He referred to the difficulty all those present at thismeeting were having in justifying a settlement withoutan interest element. It is pretty clear to me.

Q10 Mr Bacon: What I don’t understand about thisis that this is one of your top lawyers. What is theposition that Anthony Inglese holds?Dave Hartnett: He is our general counsel andsolicitor.

Q11 Mr Bacon: So he is a very important lawyerwithin HMRC?Dave Hartnett: Yes.

Q12 Mr Bacon: And he was at the meeting, and itwasn’t clear to him at the meeting, apparently,whether you “had settled on £24m or on whateverthe principal was.” There was then a discussion aboutwhether there could be “justification for settlingwithout interest”. Now, this note is dated 8 December.What date did your meeting with Goldman Sachstake place?Dave Hartnett: I believe that it was 19 November.

Q13 Mr Bacon:19 November. I read in thenewspaper that it was 30 November—or was it at asubsequent meeting where they discovered yourmeeting that had taken place on the 19th? Perhaps thatis the way round it was. But you think that you meton the 19th?Dave Hartnett: I believe so.

Q14 Mr Bacon: And was there a note of what wasagreed at that meeting on the 19th?Dave Hartnett: I don’t know, Mr Bacon.

Q15 Mr Bacon: You don’t know?Dave Hartnett: No.

Q16 Mr Bacon: You were negotiating the deal onbehalf of HMRC—

Dave Hartnett: No. I don’t want to be difficult, butyou keep saying that I was negotiating a deal. I wentto assist my colleagues to deal with a very difficultrelationship issue. One of the things that I did to assistthe relationship issue was to persuade someone tocome in from New York from Goldman’s, because itwas quite clear that elements of the relationship in theUK had broken down.Chair: I have to say to you, Mr Hartnett, that yourofficials say that you shook hands and it was yoursettlement. Your name is all over this note.

Q17 Mr Bacon: I don’t understand how there cannotbe a record from the HMRC side of the meeting. Thatyou don’t know whether there was a record or not ofthe meeting is astonishing.Dave Hartnett: Well no, because the other HMRCpeople at the meeting were the head of our bankingsector in the large business service and the caserelationship manager with the bank. They are peoplewho were managing the issues and would have madethe note. I went abroad fairly soon afterwards—

Q18 Mr Bacon: You didn’t see the note.Dave Hartnett: No, I haven’t seen the note.

Q19 Mr Bacon: That is extraordinary. I worked in abank—in a fairly junior capacity—and one of thethings you always did without fail was to take a noteof a meeting. That was just normal practice. First ofall, you answered by saying that you didn’t knowwhether there was a note. Then you said that therewould have been a note. Then you said that youhaven’t seen it. Yet this was an extremely importantmeeting with some very top people there: your largebusiness guy; your client guy; you, the senior officialin the entire organisation—and you are telling us thatyou didn’t see a note of the meeting afterwards.Dave Hartnett: No, I didn’t. I left the country shortlyafterwards to go and visit another Government.

Q20 Mr Bacon: And yet we now know that that wasthe date upon which this agreement was struck, whichsubsequently your top lawyer seems to be havingsome difficulty with, because he wants to assist youwherever possible, but not if it is “unconscionable”.The problem that he, and the meeting, appeared tohave—indeed, the wording in the note is “all present”,I think—Chair: It says: “He referred to the difficulty all thosepresent at this meeting were having in justifying asettlement”. It is the last sentence.

Q21 Mr Bacon: Yes, all those present at the meetingwere having difficulty “in justifying a settlementwithout an interest element.” This appears to be thebone of contention, because you ended up agreeing asettlement that did not include the extra interest,despite the fact that they had resisted for five years,put up a stooge witness and all the rest of it. You havenot seen a note of the meeting at which that decisionwas made, with your imprimatur not to pursue themfor the interest. Subsequently your top legal peopleare saying that they are very uncomfortable with it

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and that they cannot assist you with something thatis unconscionable.Dave Hartnett: Well, I would never want them toassist me with anything that is unconscionable.

Q22 Mr Bacon: The whole thing sounds extremelyodd, Mr Hartnett.Dave Hartnett: Well, when I answer questions fromMr Norman I have to be careful—I expect we will geton to taxpayer confidentiality shortly—with what Isay, because I cannot breach taxpayer confidentiality.But if you look at the transcript of the TSC hearing, Imake it clear that there was an issue in relation towhich a mistake was made, because we saw animpediment to dealing with an issue. In fact, theimpediment had been removed. A number of us at themeeting did not know that.

Q23 Chair: That sounds like a bit of gobbledegook.Was the taxpayer ripped off in the deal that you didwith Goldman Sachs?Dave Hartnett: Absolutely not.

Q24 Chair: Did we lose £10 million that we shouldhave had?Dave Hartnett: The sum is smaller than that.

Q25 Chair: What was it?Dave Hartnett: I am sorry, but I am now in grievousdifficulty of breaching taxpayer confidentiality.

Q26 Chair: Well, the figure in the public domain is£10 million. Our duty as a Committee is to ensure thatyou provide value for money in the work that you doin settling tax disputes. There is a lot of money atstake. There is £25 billion outstanding in tax disputes.Therefore, in the same way that we delve into thedetail when we look at the development of fire stationsor whatever, we will delve into the detail here. Itappears that £10 million was lost to the taxpayerbecause of the deal that you did with Goldman Sachs.Dave Hartnett: Well, I’m sorry—

Q27 Chair: We were ripped off. The taxpayer wasripped off. That is what it feels like.Dave Hartnett: No, I do not agree with that at all. Amistake was made. Papers have appeared in themedia.

Q28 Chair: How much did we lose on the back of amistake made?Dave Hartnett: Chair, I cannot answer a specificquestion about that.

Q29 Chair: The difficulty is that our duty as aCommittee is to ensure value for money for thetaxpayer. My problem with this, and in reading all thepapers preparing for today, is that you are the guy whodoes the deals, you are the guy who sits on the boardthat vets the deals, you are the commissioner who vetsthe deals and you are the guy who decides what comesinto the public domain. The NAO does not look at thedetails, so there is nobody checking on whether thedeals that you personally do provide value for money

for the taxpayer. It is an outrageous, unprecedentedsituation.Dave Hartnett: With enormous respect, I do nosettlements on my own.

Q30 Chair: We don’t know that—nobody knows.The minutes we have are of a meeting—either theyare lying, or there are lies around the place—wherethe minutes clearly say to me that you made that dealwith Goldman Sachs.Dave Hartnett: Well, I am sorry, but not one personnamed in that minute was there. There were a numberof people in the room. I did not do a deal personally.

Q31 Mr Bacon: You may not be the only person inthe room, but it is an odd state of affairs when yourown chief lawyer—your own general counsel—hasserious concerns about what you appear to have done.In the case of Vodafone, it was clear in the controlledforeign corporations case there that the experts insideHMRC who knew the law on that issue were excludedfrom the meetings. They were explicitly not consulted.Here you are doing a deal where you forwent theinterest. Presumably, in the earlier days, one of theaspects of the dispute was that you wanted the interestif they continued to resist.Dave Hartnett: Of course.

Q32 Mr Bacon: Did HMRC warn Goldman Sachsthat if it continued to resist, it would continue to beliable for the interest?Dave Hartnett: The interest was always in our mind,Mr Bacon.

Q33 Mr Bacon: Did HMRC warn Goldman Sachsthat it would be liable for interest if it continued toresist?Dave Hartnett: I am sorry, you are asking me to crossthe margin of taxpayer confidentiality again, butmaybe I can pick up the prior point you made. As wehave said before, on the Vodafone case, at no stagedid I or anyone else stand down experts. Our foremostexperts were involved in the matter.

Q34 Mr Bacon: Let me help you on this question ofthe warning. HMRC did warn Goldman Sachs that ifit resisted it would be liable for the interest; that wasin the letter written by HMRC to Goldman Sachs in2005. And yet here we are, five years later, and youjust, with a wave of the hand, agreed. Despite the factthat it had resisted enormously—and all the otherpeople involved in this type of scheme and the otherusers of the scheme basically ‘fessed up and settled—Goldman Sachs held out and does not pay any extrapenalty. This is one of the things that Mr Inglese andhis colleagues in the meeting were so concernedabout.As the Chairman quoted earlier: “It was clear…theproposed settlement gave GS no additional penalty forhaving resisted for 5 more years.” As Dean Rowlandexplained, Goldman Sachs was “raking everyconceivable point in the Tribunal, and putting up a‘stooge’ witness when Mr Housden”—a GoldmanSachs official—“was the obvious person to answerquestions.” It did not suffer any penalty for that. For




the avoidance of doubt, what we are talking abouthere is a scheme whose purpose was to ensure thatextremely rich and extremely highly paid people paidless tax and national insurance in this particular caseon their bankers’ bonuses than would otherwise havebeen the case. I do not think that this type of dealwould have been available to a medium-sizedcompany of 150 employees in my constituency,would it?Dave Hartnett: Mr Bacon, what I have made clearalready—

Q35 Mr Bacon: We are supposed to be equal beforethe law.Dave Hartnett: That is a principle of HMRC. Therewas no wave of the hand. There was no pushing asideof interest in order to secure a deal. That is not whathappened. Mr Rowland was not there; nor was anyoneelse. A mistake was made and it was actually me whotook the mistake to Mr Inglese.

Q36 Chair: A mistake was made that cost thetaxpayer what?Dave Hartnett: I cannot answer that, Chair.

Q37 Chair: I will go to Austin, but first I will sayone final thing before I hand over to Austin. I stillassert that in whatever role you played with GoldmanSachs—you clearly played a role, as you say,alongside others—you lied to the Treasury Committeein saying, “I do not deal with Goldman’s tax affairs”.You did not say, “I do not solely deal with Goldman’stax affairs.” You said, “I do not deal with Goldman’stax affairs”. You did, and that was a lie.Dave Hartnett: No, it was not, with respect. I do notdeal with Goldman’s tax affairs. I do not know aboutits tax provisions, how much tax it pays generally—

Q38 Chair: Wasn’t this negotiating? This is reallyplaying with words. This negotiation was dealing withGoldman’s tax affairs. It was dealing with a reallyimportant part of Goldman’s tax affairs.Dave Hartnett: I went to the meeting to make therelationship work.

Q39 Mr Bacon: But the point the Chairman isseeking to make is that less than a year before youtold the Treasury Committee “I do not deal withGoldman’s tax affairs”, you have been in a meeting inwhich you have dealt with Goldman’s tax affairs. Thatis the point. I accept what you are trying to explain.You would have been more accurate if you had said,“It’s not my job normally in the ordinary course ofbusiness to deal with Goldman’s tax affairs on amonth by month or week by week basis. That’s notmy job. But occasionally I have got involved.” Thatmight have been a more accurate way of putting it,but it is not what you said. You just said, “I do notdeal with Goldman’s tax affairs”, when in fact youhad.Chair: It is even worse. You said, “I knew nothing ofGoldman’s tax affairs”, but you had been at a meetingto discuss it.Mr Bacon: “When I was at that supper” may havebeen true for all we know. But the next sentence, “I

do not deal with Goldman’s tax affairs”, was not atrue sentence. It should have been qualified; it was nota true sentence.Dave Hartnett: I am really sorry. In the cut and thrustof the hearing, I said “I knew nothing of Goldman’stax affairs when I was at that supper. I do not dealwith Goldman’s tax affairs.” I do not deal withGoldman’s tax affairs in the way I have dealt withhundreds of thousands of people’s tax affairs duringmy career.

Q40 Nick Smith: So what were you assessing at thatmeeting apart from Goldman’s tax affairs?Dave Hartnett: The fact that the relationship hadbroken down and that the issue was not being movedforward. My colleagues dealt with Goldman Sachs.

Q41 Nick Smith: But the nub is you were talkingabout the tax affairs.Dave Hartnett: With respect, Mr Smith, I did not havethe deep knowledge to deal with Goldman’s taxaffairs. I did not make a deal. I did not wave interestaway.

Q42 Austin Mitchell: But you cannot be surprisedthat we find it inconceivable that you can go into ameeting with Goldman Sachs—which is not, after all,a charity for handing money to impecuniousbankers—not knowing anything about its tax affairs.Do you go into all meetings as ignorant as that?Dave Hartnett: No, Mr Mitchell, I do not go intomeetings ignorant—I try very hard not to do that. Idid not force myself into that meeting or anything likethat, I was asked by my colleagues for assistance andI sought to provide it, mainly with the relationshipissue. My colleagues were seeking to settle something.

Q43 Austin Mitchell: Relationship advice. That isvery interesting. Perhaps you would give us someinformation here, because the Chair has asked for anestimate of how much was given away to GoldmanSachs. My understanding is that we are talking about£22 million that was not paid in national insurancecontributions on bankers’ bonuses. What would theinterest on that be, and how long was the periodinvolved?Dave Hartnett: I cannot answer that question.

Q44 Austin Mitchell: Well, can you give us a notestating the number of years involved, the rate ofinterest that would be charged and the amount ofinterest written off?Dave Hartnett: I don’t know whether I can give youa note—I don’t think I can, because I think the lawprevents it.

Q45 Chair: I know Jo wants to come in on this, butI shall just tell you why this is deeply irritating. Weare trying to find out whether the work you doprovides value for money. You are hiding behindconfidentiality on a case that is in the public domain,and about which we have published whistleblowers’information—that is where a lot of this comes from,so it is protected. You are perfectly at liberty in thatcontext. It is all in the public domain, it is protected




anyway and, by answering, you would help us todecide whether or not you and your team providevalue for money. Do not hide behind confidentiality.Dave Hartnett: Before I came here, I put together formyself a mental profit and loss account of the issuesthat I and my colleagues have dealt with over the pastfive years. The mistake that was made, for which Iand my colleagues are very sorry, is one thing; theincome side of this is billions of pounds. It may behelpful if I say something about the legal position.Chair: We will come to that, but people want topursue this point.

Q46 Austin Mitchell: Can I pursue it? You had givenGoldman Sachs a huge competitive advantage. All itscompetitors coughed up in 2005, but you gave it thefull use of all that money from 2005 to the date ofsettlement. That is a big advantage given to GoldmanSachs—you would not give such an advantage to anysmall business that is hounded and punished forinterest payments.Let me move on. There is a great similarity betweenthat deal with Goldman Sachs and the one youreached with Vodafone. In each case, the interest wasnot charged. Why was that?Dave Hartnett: Well, I gave to the Treasury SelectCommittee an example—a particular example—of thecircumstance in which interest would not be charged.I face the same difficulty, Mr Mitchell, with yourVodafone question as I face with your Goldman Sachsone. I cannot talk to the Committee about the affairsof an individual—Chair: Would you talk to us in confidence?

Q47 Austin Mitchell: Perhaps you could give us theinterest on the Vodafone affair. I remind you that theadvice given to HMRC from leading tax silk MalcolmGammie was that it could recover the dodged nationalinsurance if it went to court. That meant that, underits own litigation and settlement strategy, it must notreach an out of court settlement for less than 100% ofthe tax and interest at stake. In other words, you arecutting right through—defying—your owndepartment’s strategy on tax settlement.Dave Hartnett: Mr Mitchell, I am sorry that this hasarisen, but the really difficult issue is truly—and I saythis in all conscience—that a mistake was made. Itwas a mistake; it was not a deal to wave away interest,as Mr Bacon says. I am prevented by law from—Chair: You are prevented by choice, not by law.

Q48 Mr Bacon: May we pursue this point for aminute? I am literally looking at the Wilberforce andScarman judgments that point out that the laws of theUnited Kingdom have long struck a public interestbalance between taxpayer confidentiality and theRevenue’s official secrecy on the one hand andaccountability and taxpayer confidence in theadministration of the tax system on the other, so it isnot an absolute. In fact your own legal advice saysthat it is not an absolute duty against disclosure andyou have discretion in the exercise of your functions.That is true isn’t it?Dave Hartnett: There is discretion in relation to ourfunctions, but maybe I can set out—

Q49 Mr Bacon: One of your functions is ensuringthat the public have confidence in the tax system andthat you are able to account to Parliament asaccounting officer—or at least your colleague, LesleyStrathie, is able to account to Parliament as accountingofficer—for the effective, efficient and economicadministration of the tax machinery, so plainly youcould make a very good case for saying that in certaincircumstances disclosure is required. It is not adifficult conclusion to reach.Dave Hartnett: The Commissioners for Revenue andCustoms Act 2005 sets out very clearly public interestand similar issues. Our view, which we have beenthrough with our own lawyers and legal counsel, isthat we are prevented from disclosing information andthat these provisions reflect earlier provisions and thatis a well established policy here. There are gatewaysand section 18 of the Commissioners of Revenue andCustoms Act provides greater strictures than we hadbefore. The key, Mr Bacon, is that there is no specificgateway that enables the disclosure of information toparliamentary Committees and our advice is that I orany other official in HMRC disclosing specifictaxpayer information to a Committee is in jeopardy ofcommitting a criminal offence.

Q50 Stephen Barclay: May I just pick up on thatpoint? I think it goes to the nub of whether you areprevented by law from discussing individual cases orwhether it is your choice. In your evidence a littleearlier, you said, “I don’t think I can, because the lawprevents it”, whereas at the Treasury Committee youwere a bit clearer. You said that you “cannot talk”about it—in other words, you were preventedlegally—and, “twice in the last 10 days I have beento see our most senior lawyers to see whether therewas anything” you could do, so even if you wantedto, you were prevented. Again you said that you wereprevented by law. Perhaps we can work our waythrough it. Section 18(1) prevents disclosure except inthe circumstances described in subsection (2). That iscorrect, is it?Dave Hartnett: Yes.

Q51 Stephen Barclay: Okay, so if we then look atsubsection (2), it says that disclosure is permitted, andthis is the point that Richard alluded to, if it is madein connection with “a function of the Revenue andCustoms”. Is that correct?Dave Hartnett: Yes.

Q52 Stephen Barclay: One of those functions is toassist Parliament. Is that correct?Dave Hartnett: Let me just have a look at the listof functions.

Q53 Stephen Barclay: One of the functions ofRevenue and Customs is to assist Parliament.Dave Hartnett: Could you point to that in the list offunctions, Mr Barclay?

Q54 Stephen Barclay: I’ll go one better. I’ll quotefrom the first Treasury counsel, who said in theminutes to the meeting dated 23 June 2009, paragraph6, “In any case, we sought legal advice from First




Treasury Counsel. He advised that as PAC are aparliamentary body with an oversight role overHMRC it follows that HMRC’s functions wouldextend to assist PAC with that oversight role. So thereis no absolute bar on disclosure but this would still beat HMRC’s discretion”. The first counsel is makingthe point that I am making, which is that a functionof HMRC is to assist Parliament. Is that correct?Dave Hartnett: Mr Barclay, I have to say to youhere—and I fear that you are not going to like thisanswer—that I am unable to discuss the legal adviceof Treasury counsel.

Q55 Stephen Barclay: I am not asking you todiscuss the legal advice, Mr Hartnett. I am asking youto explain whether a function of HMRC is to assistParliament. I am not even asking you about thisspecific issue. I am asking you about whether afunction of HMRC, as first Treasury counsel advised,is to assist Parliament. It is a very straightforwardquestion. Yes or no?Dave Hartnett: I am going to say that I don’t know,because—

Q56 Mr Bacon: You don’t know whether one of yourfunctions is to assist Parliament?Dave Hartnett: Mr Bacon, I want to be as open as Ican. I am sitting here with advice—

Q57 Mr Bacon: You are here now, assisting us. It isplainly one of your functions. It is obvious—why evendiscuss it? It is obvious that one of your functions isto assist Parliament.Dave Hartnett: Because the same advice that MrBarclay has quoted from—I have no idea whether youhave the full advice, because this material appears tohave been leaked—says that providing informationabout specific taxpayers will put officials in jeopardyof prosecution.

Q58 Stephen Barclay: With respect, that is adifferent point. I note that, at the Treasury Committee,three different members complained to you aboutwhat they termed “Sir Humphrey” answers. I wasasking a very straightforward question; I was notasking about the wider legal advice. Is a function ofHMRC to assist Parliament? It stands to reason thatthe answer is yes or no.Dave Hartnett: I believe it is a function of HMRC toassist Parliament.

Q59 Stephen Barclay: Okay, thank you. If it is afunction of HMRC to assist Parliament, there isnothing in the 2005 Act that legally prevents you fromdiscussing an individual case, which is contrary to theadvice given to Edward Leigh, the former Chairmanof the Public Accounts Committee.Dave Hartnett: I am sorry; I did not understand that.

Q60 Stephen Barclay: The letter that was sent in2009 to Mr Leigh specifically cited section 18 of the2005 Act as the grounds on which you could notdisclose individual cases to the Committee. What youhave just said to us is that a function of HMRC is toassist Parliament. The 2005 Act does not prevent you

from discussing individual cases that relate to afunction of revenue. Therefore, there is nothing in the2005 Act, as I understand it, that prevents you; it isyour choice whether you do so, but you are not legallyprevented from doing so. That is correct, is it not?Dave Hartnett: If I may read out section 18 fully, itsays, “is made for the purposes of a function of theRevenue and Customs, and…does not contravene anyrestriction imposed by the Commissioners”. Thecommissioners of Revenue and Customs, when—

Q61 Chair: That’s you.Dave Hartnett: There are others.

Q62 Chair: Yes, but you’re a commissioner. Don’tpretend that they are separate people.Dave Hartnett: I am certainly not suggesting that Iam not a commissioner. When this was put to thecommissioners and, indeed, to our executivecommittee, they took the view, on advice, that thestrict rule of taxpayer confidentiality—which Iexpounded for the TSC and here today—was theirunderstanding of the position. The Mr Eadie advice,which you appear to have, makes it clear as well thatnone of this is free of difficulty.

Q63 Stephen Barclay: Again, that is a differentpoint. My point is that, in law, you are not preventedby the 2005 Act from disclosing this information. Itis entirely at your discretion whether you wish not todisclose information, but you are not prevented in lawfrom doing so.Dave Hartnett: My advice, Mr Barclay—what Iwould like to do, because it seems to make moresense, is write to you fully.

Q64 Stephen Barclay: But you have alreadyconsulted on this issue. You even spoke twice beforeseeing the Treasury Committee, at which point yousaid, after talking to the most senior lawyers—youtook a special interest in this before—that you wereprevented legally. Having had that advice and aftertelling the Treasury Select Committee that you werelegally prevented, now you are saying that perhapsthat advice is not correct and that you need to speakto lawyers again.Dave Hartnett: No, I am not saying that at all. I amsaying that that is my advice, and my advice has notchanged—the advice I have received.

Q65 Chair: So writing to us will simply confirmwhat you are saying.Dave Hartnett: I am offering to write fully around theconsiderations that I have discussed with our lawyersand to explain the advice that I have received.

Q66 Chair: Well, we welcome that, but I do notthink it takes us further. I’ll come back to you later,Stephen.

Q67 Joseph Johnson: I just want to go back toGoldman, if we can. The £24 million that seems to beat stake here is a small proportion of the £25.5 billionof outstanding potential tax that is at risk. It is 0.1%,if my calculator is correct. It surprises me that your




personal intervention was necessary for such arelatively trivial sum. Why doesn’t your Departmenthave the capacity to deal with such trivial sums inthe context of the outstanding amount without yourpersonal intervention?Dave Hartnett: There are two or three things that Icould say. First, I am the head of tax, and mycolleagues consult me regularly. I do not normally getinvolved with issues such as £24 million. There wasa huge relationship issue, and from my previous work,I happened to know someone who I thought couldunlock it, and that person flew in from New York.

Q68 Joseph Johnson: You weren’t talking about thetax affairs per se—you have already made that clear—but you were talking a lot during that meeting. Howlong did it last? What were you talking about? Whatwas the personal relationship that was so important tothe successful management of the tax affairs ofGoldman Sachs that it required your personalintervention?Dave Hartnett: From memory, the meeting was acouple of hours—maybe a little longer, maybe a littleshorter. The relationship between our team and theGoldman’s team had got into a bad place.

Q69 Joseph Johnson: In what sense?Dave Hartnett: The teams weren’t getting on witheach other; they weren’t making any progress; andthere was no meeting of minds on any issue.

Q70 Chair: You had dinner with Goldman Sachs on19 May 2009, and you also had lunch with GoldmanSachs on 25 July 2008, yet it is so small in terms ofoutstanding liability.Dave Hartnett: Neither of those had anything to dowith Goldman’s as such. The supper—it was hardly adinner—was about explaining developments ininternational tax practice to 20 chief finance officers,and the lunch was on private business with somebodywith whom I set up the business tax forum.

Q71 Chair: Is it sensible to have lunch and dinnerwith people with whom you are in dispute?Dave Hartnett: Do you know, I had no idea we werein dispute at that time.

Q72 Joseph Johnson: It surprises me that it is thatimportant for there to be buddy-buddy relationsbetween HMRC and someone that is liable for tax.Dave Hartnett: There is no cosy relationship at all.

Q73 Joseph Johnson: Well, what is wrong with thestraightforward application of the tax code?Dave Hartnett: That is exactly what we were tryingto do.

Q74 Joseph Johnson: And why does that requireamicable relations between HMRC and Goldman?Dave Hartnett: It doesn’t particularly requireamicable relations; it requires the dispute to bemanaged in an orderly way. That is what I was tryingto facilitate.

Q75 Joseph Johnson: But the tax code is set downin legislation. It is relatively simple to apply, is it not?Dave Hartnett: Surprisingly enough, no.

Q76 Joseph Johnson: Why did it require yourpersonal intervention to repair a human relationship?Dave Hartnett: My colleagues asked me to help, andI agreed to do so. That is part of my role.

Q77 Joseph Johnson: You mentioned that you flewsomeone in from New York. Was that an HMRCperson?Dave Hartnett: No, it was the global head of tax atGoldman’s.

Q78 Joseph Johnson: Who you requested to attendthe meeting in London.Dave Hartnett: I asked him whether he would come.As I said, I’ve met him in the context of the OECD.

Q79 Joseph Johnson: Continuing with the Goldmanstuff, did you personally sign off the Goldman Sachssettlement?Dave Hartnett: No, the Goldman tax settlement wasdelayed but went through a governance process inwhich an error was found. It was then considered bycommissioners and by other senior officials.

Q80 Joseph Johnson: Did one of the commissionerssign it off, and were you one of those commissioners?Dave Hartnett: I was.

Q81 Joseph Johnson: How many othercommissioners were involved in signing it off?Dave Hartnett: One other.

Q82 Joseph Johnson: So you oversaw the processby which the settlement was arrived at, and you werethen 50% of the commissioners who agreed that it wasa fair settlement?Dave Hartnett: Yes.

Q83 Joseph Johnson: The Goldman Sachssettlement was, therefore, one of the four large taxcases in which you bypassed your own governancearrangements?Dave Hartnett: I can’t answer that question.Joseph Johnson: It self-evidently is.Dave Hartnett: We really did not bypass our owngovernance arrangements. For those cases, we set upbespoke governance arrangements because people—Joseph Johnson: Bypassing your own governancearrangements.Dave Hartnett: Because the people who sit on thehigh-risk corporate programme board were all peopleinvolved in the cases.

Q84 Joseph Johnson: I am just going to pedal back,if I can. You set up, I think, in 2007 or 2006, thishigh-risk corporate board.Dave Hartnett: Yes.Joseph Johnson: To enable a bit of objectivity to begiven to big settlements, to enable people to step backand say, “Is this really a fair settlement for thetaxpayer?”




Dave Hartnett: Yes.

Q85 Joseph Johnson: In a number of the largest taxcases you decided to bypass that special arrangement,which you had set up specifically for that purpose.Could you please explain why you decided to bypassthat governance arrangement, which had beenspecifically set up to deal with exactly the case thatGoldman Sachs presented?Dave Hartnett: I think I have, but let me go backagain. We set up for each of those large cases the roleof inquiry co-ordinator: someone who would managethe case. We used very senior people to do that, andmany of those senior people actually sat on the high-risk corporate programme board. Given theirinvolvement in the case, we decided that bespokegovernance arrangements could apply, and that iswhat we did.

Q86 Joseph Johnson: Did you need to seekanybody’s authority before giving yourself a waiveron the need to apply the standard corporategovernance arrangements?Dave Hartnett: Well, one case had started before thehigh-risk corporate programme was set up. One wasoutside the high-risk corporate programme—I thinktwo were actually outside the high-risk corporateprogramme. The high-risk corporate programme is notjust a governance mechanism; it is a way of working.It is a way of working I first saw in the United States.It looked like a very good way of us makingsignificant progress on cases that had been going onfor a long time, or where disputes were particularlydifficult.

Q87 Joseph Johnson: Did you need to consultanybody before you took Goldman Sachs outside thenormal mechanisms?Dave Hartnett: We didn’t take Goldman Sachsoutside the normal mechanism.

Q88 Chair: You did. You took them outside yourdefined strategy. You could have got 100% back andyou did not.Dave Hartnett: We made a mistake on one issue.

Q89 Joseph Johnson: You took them out of thehigh-risk corporate bracket.Dave Hartnett: They were never inside it.

Q90 Joseph Johnson: Goldman was never inside it.But in normal circumstances, because it was a largecompany and a large case, a large taxpayer, it wouldhave been inside that.Dave Hartnett: No; we make decisions carefullyabout the cases that are inside the programme, andthey were not inside the programme.

Q91 Joseph Johnson: Why? It is a large companyand a big taxpayer, one would hope.Dave Hartnett: I am sorry, Mr Johnson, you aretaking me where I cannot go again. I would need totell you something about an individual taxpayer toanswer that, but the case did go—

Q92 Chair: The important thing that Mr Johnson isasking, which the Committee would like to know, iswhether you gave yourself authority to waive whatappears to be the procedures you should havefollowed in this particular case?Dave Hartnett: No; I did not manage the taking ornot taking of this case to the high-risk corporateprogramme board. I was not involved in that. I wasnot in the country.

Q93 Chair: But according to the minutes of themeeting we have, it was your decision, and you wereone of the commissioners. You were involved. Youmight have been out of the country on the day of themeeting, but you were involved because you were oneof the commissioners that signed it off.Dave Hartnett: The case was taken to the high-riskcorporate programme board as a governancemechanism. It was not inside the high-risk corporateprogramme as a case. We use the high-risk corporateprogramme—

Q94 Joseph Johnson: You are giving contradictoryevidence.Dave Hartnett: I am trying not to, but help me ifI have.

Q95 Joseph Johnson: You have been saying quiteclearly to me for the past few minutes that it was notever in the corporate high-risk programme, and youare now saying it was taken into it as a governancemechanism.Dave Hartnett: Simply for the governance.

Q96 Joseph Johnson: But then it was taken out ofit again.Dave Hartnett: The matter was referred to thecommissioners.

Q97 James Wharton: Just on some of the evidencethat you have already given us this afternoon, MrHartnett, you said that when you met Goldman Sachsand went to a lunch and a supper, you did not knowthat HMRC was in dispute.Dave Hartnett: Yes.

Q98 James Wharton: The employee benefit trustissue affected a number of companies, did it not?Dave Hartnett: Yes.

Q99 James Wharton: HMRC resolved it in 2005.Dave Hartnett: Yes. I oversaw that.

Q100 James Wharton: And is it true that 21companies held their hands up and said, “We acceptwhat the court has said, and we will pay,” andGoldman Sachs was the only one that did not, at thattime?Dave Hartnett: I think the number was slightly larger.I think there was another that couldn’t, rather thandidn’t, settle, and then I think what you said is fair.

Q101 James Wharton: Yet you did not know thatthere was an ongoing dispute. I just want tounderstand why you did not know. You oversaw this.




Everybody else either settled and paid up or said, “Wecannot,” for a variety of reasons. Goldman Sachs hadnot and was fighting tooth and nail not to, and yet youdid not know that there was a dispute.Dave Hartnett: I was dealing with numerous other taxissues at the time. I went to Goldman’s to lunch tosee a—

Q102 James Wharton: I don’t dispute any of that,but you said very specifically in your evidence thisafternoon that you did not know that there was adispute. Is that is accurate.Dave Hartnett: I think it is, Mr Wharton. It wascertainly not in my active knowledge at the time.

Q103 James Wharton: I find that surprising—Dave Hartnett: I am very sorry.James Wharton: But I accept your answer.Chair: We will check the answer.

Q104 James Wharton: I appreciate that you disputewhat has been in the media.Dave Hartnett: I do.

Q105 James Wharton: The media imply that therewas handshake meeting between yourself andGoldman Sachs that led to a resolution. Myunderstanding of your evidence is that there was ameeting about relationships, but not about that specificissue. Can you tell us who was at that meeting? WasDavid Goldberg at that meeting?Dave Hartnett: Goodness—the people at the meetingfrom HMRC were the head of the banking sector andthe large business service and the relationshipmanager for Goldman’s. There were threerepresentatives of Goldman’s. This is terribly difficult.My advice is that I cannot name them. There was noone else.

Q106 James Wharton: You say that you cannotname them. Is that off the top of your head or is thatbecause you just do not know?Dave Hartnett: No, my advice is that that is taxpayerconfidential information.

Q107 James Wharton: So you cannot because of theadvice that you have been given. You cannot tell uswhether David Goldberg was there.Dave Hartnett: No, I think I have given you theanswer to that slightly obliquely. Three Goldman’sofficials and three HMRC officials were there.

Q108 James Wharton: Okay. Did you ask for abriefing before you went to that?Dave Hartnett: I did. I had a briefing a day or twobefore. It was a short briefing.

Q109 James Wharton: Did that briefing mention thedetail of this ongoing dispute? Would it normally?Dave Hartnett: It mentioned certain details of theissues that were going to be discussed.

Q110 James Wharton: I want to ask a slightlydifferent question. You have said several times that amistake was made. Although I appreciate that you do

not feel that you can reveal the quantum of the costof that mistake, it had a cost to the Revenue. Whomade that mistake?Dave Hartnett: I was the most senior person there. Iam entirely responsible for it.

Q111 James Wharton: If you make a mistake inmost walks of life that ends up costing, say, a privatecompany a significant sum of money, there would besome sort of disciplinary action. What disciplinaryaction has been taken in respect of that mistake?Dave Hartnett: None. Mr Wharton, we learn from ourmistakes as an organisation, and we have learned fromthis one.

Q112 James Wharton: I need to understand that. Iaccept that if the mistake is in the framework thatexists, you would therefore amend the framework, butif it is a mistake by an individual, who for whateverreason has not done their job properly, you wouldexpect some sort of action to be taken against thatindividual who made the mistake or the responsibleperson if they were taking responsibility. Was it amistake in the framework that existed in the systemsat HMRC? If it was, what has changed? Or was it amistake by an individual, and if so, why has nodisciplinary action been considered against thatindividual?Dave Hartnett: A mistake about what seemed to be alegal impediment was made by a number of people,and we have made sure that a mistake like that cannotbe made again.

Q113 James Wharton: Just for absolute clarity, hasany disciplinary action been taken against anybody asa result of that mistake?Dave Hartnett: No.

Q114 James Wharton: But you have amended yourprocedures so that that cannot happen again.Dave Hartnett: We certainly have.

Q115 Matthew Hancock: I just want to follow up onexactly that point. People make mistakes. You cannotreveal to us the numbers that you were looking atrelative to the mistake, which I think would behelpful—not least to you—to put this into context.Dave Hartnett: Absolutely.

Q116 Matthew Hancock: But I am worried aboutthe accountability around this. There are proceduresin place to ensure that you cannot make public anindividual company’s tax position. But what I amconcerned about is that the system ensures that, whenmistakes like this are made, they are learned from andthat the people who make them are held responsible.How many mistakes of this scale are made?Dave Hartnett: With respect, Mr Hancock, we havenot got anywhere near the scale issue yet, but we arenot an organisation that is prone to making mistakes.Chair: We don’t know. People have no idea.

Q117 Matthew Hancock: So how many mistakes ofa scale in the millions are made by HMRC each year?




Dave Hartnett: Few, because often we are able—normally we are able to intervene to correct thembecause they are spotted by the process. I spotted themistake here.

Q118 Matthew Hancock: After it had been made.And what process is there to ensure that those notresponsible for the mistake can hold to account thosewho are responsible for such mistakes?Dave Hartnett: There are line management issues inthere that are important. We expect our managers,when mistakes are made, to ensure that people learnfrom them. I think, Mr Hancock, if I may, there isanother important issue here. You have the NAOreport and the NAO report found just two errors inprocedure in their work. They looked at 27 casesinvolving hundreds of issues. I am not suggesting fora moment that the NAO did a detailed review of taxissues. Their report makes that clear. The NAO reportgenerally gave HMRC a good write-up for ourgovernance and how we manage these large—Chair: I have to say—

Q119 Matthew Hancock: One last question. Do youthink the accountability through the NAO report, likethat, is sufficient? In these questions of large sums ofpublic money, is there sufficient accountability, giventhe constraints on the ability to have a publicaccountability for your actions in this sort of area?Dave Hartnett: What I was trying to offer you, MrHancock, is the independent view of how we governthese issues. You asked me what the framework waslike. I think we have a sound framework. On thisoccasion, a mistake was made.

Q120 Chair: Can I ask the Comptroller and AuditorGeneral: do you think the loss to the taxpayer afterthe settlement with Goldman Sachs was reasonable—bad value, good value?Amyas Morse: I can certainly say that the error weare talking about, which is referred to in our report—

Q121 Chair: We do not know the quantum. Do you?Amyas Morse: Let me just go on. I think the errorwas probably one which might have led to the beliefthat interest was applicable or mistakenly thinking thatinterest was not applicable. The range of the error—not simply the amount of tax that might have beeninvolved—that it is reasonable to give is between £5million and £8 million. However, and having been atax person myself many, many years ago, negotiatingmuch smaller settlements—I have never negotiatedanything of this size—I know that a lot of factors willbe involved in this settlement. If the interest had beenon the table, it does not follow that because theinterest was not considered, as it clearly should havebeen, the settlement would necessarily have fullyreflected that in increased quantum.

Q122 Chair: Did the taxpayer get value for moneyout of the settlement that was made with GoldmanSachs?Amyas Morse: I cannot give you an answer. I am notbeing coy.

Q123 Joseph Johnson: I am sorry; I did notunderstand the interest that could be lost.Amyas Morse: What I am trying to say is this. Innegotiating any large case, a whole series of factors istaken into account and there is give and take. If it wasreally an open-and-shut negotiation—forgive me—Iam talking from very out-of-date experience. If it wasreally open and shut, it would be open and shut. Itis not as simple as that. There must be a sustainableargument on the side of the taxpayer if there is anyprolonged negotiation.

Q124 Mr Bacon: Can I just pick up on that verypoint? Twenty-one of the 22 scheme users realisedthat it was open and shut and paid up. The litigationand settlement strategy is very clear. We had thisconversation with Lesley Strathie last year on thisvery point. Where the character of the case is all ornothing, and the question is merely, “Does the lawapply or not?”, the strategy says clearly that youshould settle for 100% and you should not take down.They took down, in circumstances where it was quiteclear that interest was applicable. Not only that,HMRC had actually warned Goldman Sachs that if itpersisted in resisting, which it did for five years witha lot of spurious arguments in front of the tribunalwith stooge witnesses, that interest would be liable.HMRC itself had told Goldman Sachs that interestwould be liable; that is the context.Amyas Morse: Well, not necessarily. Setting aside fora minute whether we are talking about GoldmanSachs, if in a multi-factor settlement there was anadmitted mistake in taking into account entitlement ofinterest, I am simply making the point that if you say,“That amount of mistake is exactly the amount of taxlost”, it is a little bit simplistic. There was a compositesettlement. I think that is all I can say.

Q125 Matthew Hancock: Are you saying that thecost due to this mistake is £5 million to £8 million?Amyas Morse: I am saying that the quantum of themistake was £5–8 million.Paul Keane: The financial error was £5–8 million.

Q126 Stephen Barclay: Why was the mistakebinding, if this was an informal meeting, unminuted,with just a very brief document in advance?Dave Hartnett: You are taking me to the margin ofwhat I can and cannot say, Mr Barclay, but I am goingto try. When I recognised the mistake, the first personI turned to was Anthony Inglese as our solicitor andgeneral counsel, to ask the very question you haveasked. Here is where I’m afraid I frustrate you. Therewere a number of issues to be taken into account. MrInglese said to me that there were two entirelyacceptable approaches in law; one was to stay withthe proposed settlement and one was to put it to oneside. There I have to stop, because I begin to talkabout—

Q127 Stephen Barclay: Okay. Were thosediscussions minuted?Dave Hartnett: I don’t know the answer to that. Ireceived all of the advice.




Q128 Stephen Barclay: So you did not even getwritten advice.Dave Hartnett: I received it all. All legal advice isgood advice.

Q129 Stephen Barclay: I am not saying it was notgood; I don’t know because we cannot see it.Chair: We are trying to find value for money for thetaxpayer.Ian Swales: To come at this from a different angle,you will be pleased to know I am not going to askabout Goldman Sachs.Chair: If you are going on to something different, letus finish.

Q130 Ian Swales: No, I am coming at the same pointbut from a different angle. You said earlier that whenyou thought about this mistake, and you thought aboutyour profit and loss account, you knew about themistake but on the plus side there were billions. Canyou say what you mean by that plus side beingbillions? What are you measuring against?Dave Hartnett: What I was trying to say, Mr Swales,is that I am not proud; I am very sorry that a mistakewas made. My colleagues may want to remind me ofthings but I could not, when I was thinking about this,remember another mistake like that. So, for me, thatis on the deficit side. If you look at the NAO’s Report,I think the number is £9.3 billion brought in fromthe high-risk corporate programme, billions broughtin from other cases, and billions brought in from otherinitiatives. That was what my profit—

Q131 Ian Swales: My question is, how are youmeasuring those billions? Remember we are talkingabout tax assessments. What are you actuallymeasuring? When you say you brought in £1 billion,what is it measured against? I cannot imagine they arevolunteering to pay more tax than has been assessed.What do you mean?Dave Hartnett: I am talking about cash to start with.That is cash that we have argued is due to theExchequer that we have recovered. As the Committeehas considered before, a lot of our work involves taxavoidance. Perhaps I could go back to something thatwas said on my left, but I cannot remember by whom.It is only in the past three or four years that we havebeen able to address sums of money like this in cases;that did not happen before, so our new process works.We are mounting arguments on tax avoidance that arewinning arguments, largely, with large corporates andtheir advisers.Simon Bowles: To put that into context, Mr Swales,we achieved a compliance yield of £13.9 billion lastyear, which is double what we achieved five yearsago, in the context of—Chair: But we do not know what you lost. We do notknow what we could have got.

Q132 Ian Swales: May I then ask, because it isrelevant to what we have been talking about, what thefact that you have recovered these billions—whateverthey are—says about the records inside the InlandRevenue, in terms of assessments and so on? At theback of all this, what the Committee, and by inference

taxpayers and Parliament, are concerned about is theidea that people within your organisation and perhapsyou personally have the power to negotiate onbillions, without having too much governance oraccountability record keeping. That is the elephant inthe room that we are exploring. My question is: onceyou have got to the point that you have recoveredbillions, is that all reflected in the detailed records inthe Inland Revenue? How does it all work?Dave Hartnett: We keep very detailed records,indeed. We want them for more than one reason. Wewant them for governance. We want them forprecedent value. We also want them to record whattechniques worked and what arguments worked.

Q133 Ian Swales: So, if we go to the records of anorganisation like the one we have been talking a lotabout and we open up the files, we will know howthat organisation was assessed and what the finalsettlement was.Dave Hartnett: Absolutely.

Q134 Chair: Mr Hartnett, you are saying yes to that,but that’s a nonsense, because you would not tell usthe information—it’s a nonsense.Ian Swales: That is why I asked it the way I did,because I am asking about governance.Dave Hartnett: I’m sorry, Chair. I think Mr Swalesasked a different question.

Q135 Chair: No, he didn’t. He said, “If we went tothe file of company X, could we look at the way youdealt with them?” And the answer is no, because youwould not let us see the files.Dave Hartnett: I think he asked a different question.I am sorry, but I think Mr Swales asked the question,“Do we have the record?” And yes, we do.Chair: No, he asked, “Could we go and see the file?”

Q136 Ian Swales: Let me put it in very simple terms.We could not go to a file—could we?—in yourorganisation and see that this company, whichever itwas, was assessed for £1 billion in tax, that you did adeal and they paid £0.5 billion, and that there was asimple note saying, “And we wrote the rest off.”Would we find that in any of your records?Dave Hartnett: I would be very upset if you found arecord which said, “We wrote off £0.5 billion.” Can Ijust say, Mr Swales, that the National Audit Office hascomplete access to our records? We hide nothing fromit at all.

Q137 Stella Creasy: Mr Hartnett, I am a littleconfused, and I wonder if you could talk me throughthis. You talked about using a bespoke process. Whodesigned it?Dave Hartnett: It is truly bespoke. It works for eachof those four cases.

Q138 Stella Creasy: Who designed that bespokeprocess?Dave Hartnett: The process evolved as we tackledthe cases.




Q139 Stella Creasy: Who designed it, because if itis bespoke it was created at that point?Dave Hartnett: Well, the design of a bespoke processhappened within our business tax area and it will havebeen designed by senior officials there.

Q140 Stella Creasy: So by senior officials, but it wasnot anything to do with the high risk corporateprogramme?Dave Hartnett: Yes, because, as I said earlier,members of the high risk corporate programme boardare those senior officials.

Q141 Stella Creasy: Such as yourself.Dave Hartnett: No, I am not a member of the highrisk corporate programme board, and I have notdesigned any of those processes.

Q142 Stella Creasy: So you were made to apply abespoke process that you did not design yourself, butthat you ultimately judged.Dave Hartnett: Ultimately judged, yes.

Q143 Stella Creasy: Would you use that again?Dave Hartnett: No. We are changing the process. Welearned from what the NAO had to say, and we aremaking a significant change. We will put everythingthrough the high risk corporate programme board andwe are changing the way—we have started already—in which commissioners operate cases. We believethat there will always be a small number of cases, andthere have been only a small number of such cases inthe past, where a commissioner will be heavilyinvolved in negotiations. Where that happens infuture, two other commissioners will review theprocess to ensure that the process was appropriate.

Q144 Stella Creasy: So in this instance what youhave learned is that more than two commissionersshould have been involved, and that the bespokemodel that the board put together was not the rightmodel to use.Dave Hartnett: I want to change that just slightly, if Imay. What we have learned is there will be greaterassurance if two commissioners unconnected withnegotiations review the process.

Q145 Stella Creasy: How are you going to achievethat? You said earlier that it was quite difficult, giventhe nature of these cases, to get that level ofseparation.Dave Hartnett: We have four commissioners at themoment. As head of tax, I am most likely to be acommissioner involved in negotiations in a smallnumber of cases and, in future, any case like that willbe reviewed by two other commissioners who will beable to say, “This cannot proceed to settlement”.

Q146 Stella Creasy: That is a slightly different point,though, Mr Hartnett. You said earlier that one of thedifficulties you faced in having the separation thatyour own government structure said was required wasthat other commissioners were involved in resolvingcases in the same way that you had been. Now you aresaying that that is possible. I don’t quite understand.

Dave Hartnett: Where we are going to draw theline—and we are going to draw it veryconservatively—is that it will be acceptable for acommissioner to advise on an issue and, depending onthe degree of advice, perhaps to review the process.But commissioners who have done more than that orhave been involved in negotiations will not be part ofthe process for reviewing the process of the case.

Q147 Stella Creasy: That is terribly unclear.Dave Hartnett: Well, let me try again.

Q148 Stella Creasy: They can review, and they canadvise to some extent, but they can’t negotiate. Is thatwhat you are saying?Dave Hartnett: Let me try again. I am very sorry fornot being clear.Where a commissioner has been involved in theprocess of negotiation of a case, that negotiation andany proposed settlement will have to be reviewed bytwo independent commissioners who have had no rolein the case before it can be formally settled.

Q149 Stella Creasy: So if you are saying that that isa better process—Dave Hartnett: Yes.

Q150 Stella Creasy: You accept that the mistake inthis case was that somebody was involved in both thenegotiation and the review of the settlement, and thatcalls into question the process that was undertaken.Dave Hartnett: But there were two other peopleinvolved in the review of the settlement who hadn’tbeen involved.

Q151 Stella Creasy: But you have just said thatactually—Dave Hartnett: No, we are changing in the way Ihave described.

Q152 Stella Creasy: So you would accept that therewas a problem with the way in which this decisionwas made.Dave Hartnett: I think there has been a lack ofobjective assurance, which the NAO brought out. Wehave accepted its recommendations.

Q153 Mr Bacon: I just want to clarify with the NAO.Mr Hartnett, earlier you characterised this report asbeing quite good in its conclusions, but my reading ofit is basically that it says, “Are the processesadequate? Well, no they are not. And, to the extentthat the processes were as they stood—howeverinadequate that might have been—were they compliedwith? Well, no they weren’t.” Is that a fair summary,would you say?Paul Keane: I think it is fair to say that we concludethat the processes were adequate, but we note the fourlarge cases that have been discussed where effectively,HMRC set aside those governance arrangements, andthat’s where we raised concerns around the adequacyof the process.

Q154 Stella Creasy: There is something thatconfuses me. If you are saying that you need to use a




different system and you did not design that originalbespoke system, what did you say when they came toyou and asked you to take part in the resolution ofthis case? Did you not raise concerns yourself that youwere being put in a difficult position?Dave Hartnett: Can I just explain the process bywhich we raise the level of assurance on cases? Thehigh risk corporate programme board will agree tosettle cases where more than £100 million isinvolved—under consideration, that is, because itmight not be £100 million in cash. When it gets to£250 million, the matter has to go to commissioners,or where the high risk corporate programme cannotagree. We have had one instance of that. It goes tocommissioners because we require 100% completeconsensus agreement on the part of the high riskcorporate programme.

Q155 Stella Creasy: Mr Hartnett, this is interesting,but the question I actually asked you is about aslightly different issue. If you didn’t design thisbespoke system—and you have now outlined to mesome of the challenges that you have learnt from theNAO—why did you participate in it? You were sayingthat actually, you want in future to work in a differentway. Did you raise any concerns that you might be ina difficult position—that you might find yourselfsaying, as we are saying, “Well, how you cannegotiate and agree?”?Dave Hartnett: I have had concerns at various timesthat—if I can put it this way—I am the onlycommissioner in HMRC who has deep tax knowledge,so I was always going to be involved. I think thatthe NAO has shown there is a very clear way to dothis better.

Q156 Stella Creasy: Did you try to excuse yourselffrom this? Did you try to put that separation inbecause of your concerns?Dave Hartnett: No.

Q157 Stephen Barclay: Did you just say you are theonly commissioner with tax knowledge?Dave Hartnett: Deep tax knowledge. And there aresix tax commissioners altogether.

Q158 Stephen Barclay: So for being a commissionerof HMRC, having tax knowledge is not part of thejob spec.Dave Hartnett: Well, we have many requirements ofour commissioners. They are very talented people.

Q159 Chair: Well, how on earth are they going tojudge, if you do all the negotiation? You are nowgoing to exclude yourself in the future from signingoff those negotiations, but the people who are goingto have responsibility have no understanding of tax. Iwould not want to sign them off. Lesley Strathie hasno knowledge or qualifications on tax. If she will besigning off your work, that is not sufficient; that is nota check.Dave Hartnett: No. Alongside what we decided to doon the back of the NAO Report, we will be appointingmore commissioners—subject to the sovereignagreeing—who have tax knowledge. That is another

step. If I may, I think this analogy is reasonable—forgive me if it is not. The commissioners will haveadvice; they will be able to check whether advice wastaken; they could get advice from inside or outside theDepartment—so their position is a little like that ofMinisters, who must make decisions.

Q160 Chair: No, because what you were verycareful in saying in your evidence to us was that allthey are looking at is process. To take the Vodafoneinstance, where we know Vodafone had £2.2 billion,or thereabouts, in its accounts, set aside to settle taxdisputes, you ended up getting something like £1.4billion out of them—I cannot remember—much lessthan they had even made provision for. I aminterested, as the Chair of the value-for-moneyCommittee, in whether that loss of nearly £1 billioneven from what Vodafone had in its account, set asideto pay tax, was value for money. I need tax knowledgeto be able to assess whether the deal that you finallydid was a good deal. It is crazy to think that someonelike Lesley Strathie—and I have huge regard for heras a manger—can make that judgment.Dave Hartnett: Let me say that there is frequentlya difference between what companies provide—someprovide very low; some do not provide at all—andwhat the tax issue is resolved for.Simon Bowles: Can I just come in there? I was apublic company finance director in a previous life, andit is my experience that companies will want toprovide conservatively—often very conservatively—for their tax liabilities, because what you do not wantto do is go to the market twice: once with a surpriseabout a tax liability, and then, “Actually we had toup it.”

Q161 Stephen Barclay: What was HMRC’sassessment? I do not mean of any individual case—wehave already covered that; but what was the combinedvalue of the four cases where governance was notcorrectly followed?Dave Hartnett: Oh dear, I am having to disappointyou again, Mr Barclay. Billions, but given that anumber of the companies involved, and othercompanies, released public details of provision andthe tax they pay, if I give you a more precise figure—Chair: We do not even know which companies areinvolved. We know Vodafone, because Private Eyegets it out. We know Goldman Sachs, because TheGuardian or someone gets it out. We do not know theother two.

Q162 Stephen Barclay: On all four of those cases,was written advice sought by any commissionersigning off the deal, prior to that acceptance beingcommunicated to the company?Dave Hartnett: I am trying to remember. Certainly onthree of them there was extensive advice.

Q163 Stephen Barclay: I do not want to talk aboutVodafone. We cannot talk about specifics. Myquestion was this. There were four cases where theNAO says governance was not followed. In an earlyanswer, Mr Hartnett, you referred to one of thecontrols that we should take comfort from being the




fact that the NAO has unfettered access. I assume that,in exercising that unfettered access, it would want tosee the written legal advice in order to assess whetherthe legal case was strong—and you were one of thepeople signing off deals, as a commissioner. To comeback to my question, if I may: was written legaladvice sought, in all four of those cases, prior to anyacceptance being communicated to the companies?Dave Hartnett: I can assure you it was in three. I can’tremember for the fourth.

Q164 Stephen Barclay: You can’t remember?Dave Hartnett: I just can’t remember. I am very sorry.I will go and check.

Q165 Stella Creasy: Did the person participating inthe negotiations also review the decision? For the onewhere legal advice was not sought and the one whereyou are unsure whether legal advice was sought, canyou clarify whether it is also the case that the personparticipating in the negotiations also reviewed thesettlement?Dave Hartnett: There are three cases. The NAO willhelp if I get this wrong. For three of the four cases, atleast one commissioner was involved in negotiationsand in approving the settlement.Paul Keane: One at least, and in one case bothcommissioners.

Q166 Mr Bacon: I am staggered at so many taxcommissioners not having deep tax knowledge. I amdelighted that you are hoping to appoint more. Canyou remind us who the other two tax commissionersare, apart from you and Dame Lesley?Dave Hartnett: They are Steve Lamey, who is thedirector-general in benefits and credits, and MikeEland, who leads our enforcement and compliance.

Q167 Mr Bacon: So we are talking about full-timeemployees of HMRC. The analogy of a non-executivedirector of a public company would not apply. Theseare full-time people, one of whose jobs is to be judge,jury, executioner and gravedigger on deals. You arerightly concerned that you are the only one with deeptax knowledge, which I find extraordinary. Only inthis country could that happen. How many more areyou seeking, with the sovereign’s consent, to appoint?Dave Hartnett: Two.

Q168 Mr Bacon: And they will both have deep taxknowledge?Dave Hartnett: One will have deep tax knowledge.

Q169 Mr Bacon: Will it be a future requirement thateventually they should all have deep tax knowledge?Dave Hartnett: Our non-executive chairman has madeit clear that his aspiration for our executivecommittee—I do not think he has expressed this interms of commissioners—is that half would have deeptax knowledge. It is not like that yet.

Q170 Mr Bacon: Half would be marvellous. Thereare a number of issues I want to pursue, but MrBarclay raised the issue of the NAO having full accessand being able to decide whether the case was strong

enough. The fact is that you have resisted the NAO’sdemand for detailed legal advice. I have been lookingat an internal e-mail from HMRC, which you werecopied in on. It discusses the cases with over £100million tax at risk, which we are intending to discloseto the NAO. It states: “You will remember that NAOwere pushing very hard for detailed information onthe cases where we make a provision or contingentliability in the trust statement. Dave and Alan”—Idon’t think it is the comedian from the 1970s; Ibelieve it is you and Alan Evans—“were able toconvince them to accept less detailed information thatdid not give any indication as to whether we thoughtour case was strong or weak.” In those circumstances,it makes it very difficult for the auditors to do theirjob properly, doesn’t it?Dave Hartnett: Can we put this in context, Mr Bacon?I am sure that the NAO will help me if I go astray.These are our accounts that we are talking about. Itis the provision for disputed tax that appears in ouraccounts. The discussion that we had with the NAO,which has a lot to do with taxpayer confidentiality,was on how we could provide more transparency inrelation to the provision in our accounts. I think I havethat right.

Q171 Mr Bacon: Given that the NAO has full accessand will not disclose it further, so it should haveoversight, the confidentiality issue in this relationshipis not an issue. The issue is whether the case is strongor weak. The point is that the NAO and, indeed, we,cannot make an assessment as to whether you havebeen administering the affairs of your organisationeffectively, efficiently and economically if we cannotunderstand whether you were following your ownlitigation and settlement strategy by going for 100%in strong cases, because you have resisted telling themwhether the cases were strong or weak.Dave Hartnett: The issue there was not resisting at anabsolute level; it was what was going to be disclosedby the NAO. The Comptroller and Auditor Generalmay want to say something about this.John Thorpe: Could I say something about it? I thinkthat this relates to the audit of the financial statement.This is how the process worked. We identifiedapproaching 100 legal cases which we thought mayhave a bearing on the financial statements. We carriedout a review of those and did some in-depth testingon some of those cases. The issue is that the schedulesthat sit in the finance department are anonymised,because they cannot be passed around the organisationwith taxpayers’ details on them. To get the assurancethat we needed—first, to say what the strength of thecase was—we had to go to the legal department, andto tax experts. We also spoke with analysts about howthey quantified whether it was a liability or an asset.In a spectrum of cases, some have a liability for thedepartment, and from memory that approaches £6billion in the accounts. There are contingent liabilities,so we must identify which cases fall into that category.On the other side, there are contingent assets, andcases where the department has a potential claim torecover tax. We cannot make an assessment of howthat should be recognised without looking at the




individual papers or talking to the individual expertsto assess the strength of the case.

Q172 Mr Bacon: But that is precisely what theysay they are not given: “Dave and Alan were able toconvince them”—the NAO—“to accept less detailedinformation that did not give any indication as towhether we thought our case was strong or weak.”The list is set out as follows: alphabetical order; nosplit between cases where there is provision for acontingent liability; and a very brief description ofthe case.John Thorpe: We have very detailed working paperswith all those cases, and with the supportingdocumentation, which supports where they fall inprovision or contingent liabilities.

Q173 Mr Bacon: I understand that this is under yourfinancial audit hat, but presumably there would benothing to stop the NAO going back in with a value-for-money hat on and doing a value-for-money study,looking at the whole issue of strong and weak casesif you wished to do that.John Thorpe: Indeed. If I can talk from the financialaudit perspective, I should also say that we track thosecases. They’ve been on the books for many years, sowe are reviewing them on an ongoing basis. It is notsimply an end-of-audit activity.

Q174 Mr Bacon: I am relieved to hear it. Thank youvery much. May I quickly move on?Mr Hartnett, you mentioned in answer to Mr Whartonearlier that at the meeting with Goldman Sachs threeHMRC officials were present, and what you describedas three Goldman officials. Did you mean employeesof Goldman rather than advisers to Goldman?Dave Hartnett: Yes.

Q175 Mr Bacon: So you were not that oblique insaying that basically, David Goldberg QC wasn’tthere, because he’s not an employee of Goldman?Dave Hartnett: I keep being asked the samequestion—whether Mr Goldberg is at our meetings.

Q176 Mr Bacon: Well, it seems that many of us wantto know.Dave Hartnett: There are lots of tax silks.

Q177 Mr Bacon: It says here, “Was David Goldberg,QC there?” That is my first question. Have you hadlunch with Mr Goldberg?Dave Hartnett: Yes. I had lunch with Mr Goldbergperhaps once, twice or three times in the last fiveyears.

Q178 Mr Bacon: Three times in the last five years.Dave Hartnett: He acts for us also.

Q179 Mr Bacon: Does he—because he is a leadingtax silk?Dave Hartnett: Yes. It took a long time, but wemanaged to persuade him to work for us.

Q180 Mr Bacon: At least he has deep taxknowledge.

Dave Hartnett: Not all tax silks work for us.

Q181 Mr Bacon: I have a marvellous schedule ofyour lunches, and if I had had as many lunches I’d beeven fatter than I am. I accept that it is sensible forsomeone in your position to meet people “socially”,whether for dinner or breakfast. We all have suchencounters and they are very useful, so I’m notattacking you for that—although there are quite a lotof them—but I have a couple of questions.Dave Hartnett: May I just say something first? Manyof those are not simply lunches. I speak extensivelyon tax.

Q182 Mr Bacon: So you were guest speaker.Dave Hartnett: Quite often.

Q183 Mr Bacon: On the right-hand side, itsometimes says, “Speaking engagement”. Am I totake it that when it doesn’t say so you were still aguest speaker?Dave Hartnett: Absolutely.

Q184 Mr Bacon: Where it says “individual”, whatare we to make of that, and why can’t the individualbe named?Dave Hartnett: Because the convention that we havebeen given across Whitehall is that we don’t nameindividuals if they’re taxpayers, and the individualmight be a taxpayer.

Q185 Mr Bacon: Most people are taxpayers—or areyou having lots of lunches with non-doms?Dave Hartnett: Not really, Mr Bacon.

Q186 Mr Bacon: Everybody’s a taxpayer. Even theQueen is a taxpayer.Dave Hartnett: What we’re trying to do by that is toensure that it is not simply put into the public domainwhat individual we might be talking to about taxissues. That’s our convention.

Q187 Mr Bacon: It’s not the only view one can take.I am sure that in Sweden you can probably go in andlook at a list every day.Dave Hartnett: We have a look at the tax—

Q188 Mr Bacon: Is there any serious reason why wecouldn’t be more open about that? It would give extraconfidence, and confidence in the tax system wouldbe a good thing.Dave Hartnett: Let me put it like this: imagine thatyou appeared on my list—named.

Q189 Mr Bacon: I would be delighted to come tolunch, by the way, should you wish to invite me. I’dput it on my website.Dave Hartnett: There are probably only two reasonswhy the public at large would deduce you were there:first, that you had a constituency issue, but we do nottend to have meetings like that; and secondly, that youhad a problem. The convention is that you should notbe indentified.




Q190 Chair: I have to say, I do not take as generousa view of this as Mr Bacon does. In your position asthe chief negotiator on tax disputes, it is verydangerous for you to go and have lunches—107, weare told, in two years—with a range of organisationswith which you have been negotiating. Had I, as aMinister, done that with organisations I was doingbusiness with, I would have been on the front of theDaily Mail and pushed out of my job. That is thereality of it.Dave Hartnett: Chair, that list does not involvecompanies that I am negotiating with.

Q191 Chair: It does. Well, we don’t know becausesome of them say “taxpayer confidential”. The listinvolves a load of organisations that will be acting asthe advisers to individuals with whom you will benegotiating—PricewaterhouseCoopers happens to bethe old firm that I worked for, so I know that it wouldhave done it for them.Dave Hartnett: As I understand it, there arecompetition rules about how and when leading figuresin the big four accounting firms can get together. Onceor twice we have had real trouble getting themtogether when we wanted to talk to them. The headsof tax of the major accounting firms have supperquarterly, I think, and once or twice a year they haveinvited me to go.

Q192 Chair: You have had 107 lunches—corporatehospitality engagements—in two years, which is atleast one a week.Dave Hartnett: They are not all lunches, with respect.

Q193 Chair: Dinner, lunch—I can go through thelist.Dave Hartnett: I am scrupulous about recordingeverything.Chair: I think it is deeply unwise.

Q194 Stella Creasy: Mr Hartnett, can we stay withyour point? You said that you might not have lunchwith Mr Bacon, because people might draw inferencefrom that. What inference do you think they woulddraw from your having lunch with companies likeGoldman Sachs?Dave Hartnett: They might infer that a tax issue isunder consideration. Since we have started publishingfully, I do not do that—I find other ways of doingthings.

Q195 Stella Creasy: What other ways?Dave Hartnett: Well, maybe a cup of coffee in myoffice.

Q196 Stella Creasy: So you do not record everycontact you have with these companies.Dave Hartnett: We are not required to record a cupof coffee. Permanent secretaries are now required torecord and publish all meetings we have with peopleoutside the civil service. If you look at my publishedlist, it says “a taxpayer”; it does not say who thetaxpayer is.

Q197 Stella Creasy: Given that, potentially, fourfirms are involved, and you do not have to name anyof them, have you had more contact with—Dave Hartnett: I always name the firms.

Q198 Stella Creasy: Have you had other contact,apart from that involving just a coffee or a drink,without any food—no crisps, or whatever, down thepub—with the four firms involved in these disputes?Dave Hartnett: Sorry, I am now confused.

Q199 Stella Creasy: In that same time period, canyou clarify that the only social contact you had withthe firms that the Department was in dispute with—that you were negotiating on—was the ones that arelisted? Or were there other times when you were incontact with them?Dave Hartnett: There is nothing other than coffee—

Q200 Stella Creasy: So you confirm that, on top ofthose contacts, you had other contacts with the fourfirms in question.Dave Hartnett: Yes, they might have come in for ameeting on an issue.

Q201 Ian Swales: I understand why you might notwant to have this information in the public domain,and you have given us reasons for that. But we arealso talking about internal governance in HMRC. Isthe knowledge of whom you have seen availableanywhere in HMRC?Dave Hartnett: Yes. My line manager has it and lotsof other people in HMRC will know about it.

Q202 Ian Swales: So the top people in HMRC knowabout all those meetings.Dave Hartnett: Yes.

Q203 Chair: Who is your line manager?Dave Hartnett: Lesley Strathie.

Q204 Chair: But she is now on sick leave.Dave Hartnett: Yes.

Q205 Chair: So, who is your line manager?Dave Hartnett: Nominally—that is probably the rightway to describe it—Sir Gus O’Donnell.

Q206 Stella Creasy: So have you been in contactwith Gus O’Donnell to report all the coffees as wellas the lunches?Dave Hartnett: He gets a copy of—

Q207 Stella Creasy: He gets that list, doesn’t he?Dave Hartnett: He gets that list, yes.

Q208 Stella Creasy: He doesn’t get the coffee list.Dave Hartnett: He gets the permanent secretary’s listas well.

Q209 Stella Creasy: So he doesn’t get thecumulative total.Dave Hartnett: Miss Creasy, when I have coffee withan accountant or an adviser, it is almost always toaddress a particular issue, usually accompanied by




someone else from my department, and sometimes—if you can forgive me for putting it this way—theybring a great gang with them from their firm.

Q210 Ian Swales: Can I ask one last question? Doyou think it would be wise if you always hadsomebody else with you from HMRC at suchmeetings?Dave Hartnett: That often happens, and yes, it couldbe wise.

Q211 Ian Swales: Well, you have said it oftenhappens. I am asking, do you think it should alwayshappen?Dave Hartnett: Not necessarily, but perhaps on theback of this discussion I will think again.

Q212 Stephen Barclay: It is reasonable to havecoffees and to meet people. You have to be accessibleand you have to be able to work. It comes back to thepoint that we touched on earlier about what the writtenlegal advice is and whether the NAO has access to it.Can I take us to a slightly different area? Once youreach settlement with a firm, what is the maximumperiod over which they must settle the outstandingclaim?Dave Hartnett: That depends entirely on what theissues are and the financial position of theorganisation. Some £1 billion-plus settlements havenot been fully provided for, and there are significantissues.

Q213 Stephen Barclay: So it’s unlimited? It is atyour discretion?Dave Hartnett: No, we are always trying to strike theright balance between getting the money as fast as wecan and collecting for the Exchequer the maximumamount of money that fits with—

Q214 Stephen Barclay: I don’t want you to talkabout—well, I would like you to talk about individualcases, but you have given your position on that andyou are going to write to me with a legal note on thatearlier discussion. Can you tell us the maximumperiod that a firm has been allowed before settling itsoutstanding agreed tax bill with you?Dave Hartnett: The longest I can remember—thisgoes back a little way—was probably 10 years.

Q215 Stephen Barclay: My constituents, especiallysmall firms, would find it very odd that at yourdiscretion you are giving firms 10 years to settle theirtax bill.Dave Hartnett: Well, I don’t know about yourparticular constituents, but I can certainly say that wehave given small firms and individuals longer thanthat at times.

Q216 Stephen Barclay: Okay. Where you give afirm more than 12 months to settle its outstanding bill,do you look at its balance sheet to see what assets ithas got?Dave Hartnett: We do more that that. It is in thenature of our enquiry to look at the balance sheet. Iwould expect our people to be thoroughly familiar

with the balance sheet. Our business payment supportservice, for example, which is the way we supportsmaller businesses by giving them time to pay, willask for financial reports as well before we agree thetime. Where we are settling with a business over time,we will often ask for a bank report or some otherfinancial report.

Q217 Stephen Barclay: How are the governancecriteria around that documented within thedepartment?Dave Hartnett: We have clear guidance for our peopleon things like the business payment support service,and we have advice on the time to pay forinvestigation settlements in our manuals.

Q218 Stephen Barclay: And that is something thatthe NAO would look at?Dave Hartnett: I don’t know whether it has looked atit, but it is very welcome.

Q219 Stephen Barclay: To take a hypothetical case,it would not be possible, for example, for firm X witha bill of £1 billion to have £5 billion or £7 billionin assets?Dave Hartnett: Yes, I think it would be. It dependson what is on the other side of the balance sheet. Wewant our money—we want the nation’s money—asfast as we can get it. Normal terms are 30 days;sometimes that will stretch to months. If we cannotget it faster, we will take it over a longer period.

Q220 Joseph Johnson: On Stephen’s point about alevel playing field between smaller businesses and thelike of Goldman Sachs, I have businesses inOrpington that are being put out of business for latepayment of their VAT returns, and they are not evenbeing allowed to stagger them over a quarter, let alonea period of years, so I really don’t buy the argumentthat there is a level playing field.That is not the point that I want to go back to, whichis that we are in a period of incredible fiscalconsolidation in Britain. You have got a huge job todo—£25.5 billion of potential tax out there to beclawed in. I am concerned that HMRC’s credibilityhas taken something of a knock in the past 18 monthsas a result of the decision—not quite sure whosedecision, at this point—to go outside usual procedureswith these bespoke arrangements in respect ofGoldman Sachs, Vodafone and a couple of otherimportant cases. Do you acknowledge that—thatHMRC’s credibility in the public and between thecorporates has taken a knock?Dave Hartnett: I think the speculation, if I may callit that, about what we have done as a department inone or two large cases has been damaging to HMRCbut, actually, much of the speculation has been plainwrong. At the TSC hearing before last, for example,on advice I aimed to take away in respect of onecorporate some of the mischief that was out thereabout how we had operated.

Q221 Chair: May I ask you another question? Youdid the deal in Switzerland for UK residents with




funds in Swiss bank accounts—I understand that younegotiated that, didn’t you?Dave Hartnett: I negotiated, but it is a ministerialagreement.

Q222 Chair: Do you think it is a good deal?Dave Hartnett: I think it’s a terrific deal.

Q223 Chair: And how do you justify the differencein treatment of rich people who have Swiss bankaccounts and the single parent who is being pursuedfor an overpayment of tax credit?Dave Hartnett: I think, Chair, what we have achievedin relation to Switzerland was that—

Q224 Chair: How do you justify the difference intreatment?Dave Hartnett: I am sorry, I need to explain a littleabout Switzerland first. I will be very quick. What wehave achieved will be money for the Exchequer thatwe would not have got in any other way. We haveprotected the Exchequer in relation to cases that arealready working—so they cannot come within thearrangement—and we have protected the Exchequerin relation to serious organised crime and the like. Myanswer to you would be that this Switzerland deal isgaining for the Exchequer billions of pounds that itwould not otherwise have got. We are addressingissues in the UK for large and small individuals—

Q225 Chair: How do you justify the difference intreatment for rich people? And I am not sure that youhave protected, because they can all take their moneyoffshore to another country before May 2013. Howdo you justify the difference in the treatment of UKtaxpayers who are rich enough to have bank accountsin Switzerland, and the way your department treatsthe overpayment of tax credit to single parents—ifyou pursue it at all?Dave Hartnett: We know the people who have beenoverpaid tax credits and can address that, but we donot know the identity of people in Switzerland and wecannot establish who they are.

Q226 Chair: So your justification of the differencein treatment is—Dave Hartnett: A pragmatic solution to a long-standing difficulty.

Q227 Chair: Although they can all go offshoresomewhere else by 2013.Dave Hartnett: But we have made arrangements tofollow the money, which has been very important tous. And we will follow the money. With Lichtensteinand with Switzerland, we are bringing in hugeamounts of money for the Exchequer.

Q228 Chair: We haven’t covered everything that wewanted to this afternoon, but I think in the interests ofeveryone—if you are happy with this—we shall draw

the sitting to a close. I just want to say a general thingand ask you a final general question.What comes out of this for me and the members ofthe Committee is that there is a huge sum of money—£25.5 billion, which is an enormous amount of moneyin potential income to the taxpayer, and incrediblyimportant at a time of deficit reduction—and you areresponsible for trying to collect it. You are also amember of the board that oversees your action. Youare also a commissioner who oversees the action ofthe board on an action you have taken. The NAO doesnot do the detailed work to assess whether the dealsyou reach are value for money and, at present, thereis no way in which you account to the public or toMPs—to us as custodians of the taxpayer’s pound—and nor do you account for whether you are doing ajob that is providing value for money. That is how itfeels to me. My final question: do you feel that? Ifyou do, what would you change so that we, as thecustodians of the taxpayer’s pound, can feel betterabout ensuring that you and your team provide valuefor money?Dave Hartnett: If I may, I’ll say two things. First, Iam very confident that we are providing value formoney, but I think that both the TSC hearings andinterim report, and this hearing, make it clear thatthere are real concerns here. The TSC has flagged upto us that it wants to consider, as part of its currentreview of my department, how greater clarity can bebrought—

Q229 Chair: What is your view? You are currentlythe permanent secretary there. What is your ownview? I have to tell you that everyone came to thiswith a fantastic unanimity of view around the table—across party—and no one prepared, in that sense, forit. We came with a unanimity of view and theTreasury Committee has a similar view. You havebeen around for a long time. How can we get asystem? You tell us you are value for money, but theonly bits that hit the press question that. Yourbehaviour in relation to things like lunches makes useven more suspicious, and there is no way of verifyingthings on behalf of the taxpayer.Dave Hartnett: I think the answer to your question isgoing to have to be determined by others to whom weprovide advice. The TSC asked whether we had seensystems elsewhere. There is one in Finland, forexample, where there is an independent body betweenthe tax administration and the taxpayer when it comesto resolving issues. Most other countries have asystem like the United Kingdom’s. I did look before Icame here at the policy statements made in the UnitedStates, for example, which mirror our own missionstatements and the like. But we will provide advice toothers, because it will be their decision as to whetherthe system changes.Chair: Thank you very much. I ask my members tostay behind.

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Monday 17 October 2011

Members present:


Mr Richard BaconStephen BarclayStella CreasyMatthew Hancock

________________

Amyas Morse, Comptroller and Auditor General, John Thorpe, Director, National Audit Office, JaneWheeler, Director, National Audit Office and Marius Gallaher, Alternate Treasury Officer of Accounts, HM

Treasury were in attendance.


HMRC Tax Disputes


Witnesses: Stephen Banyard CBE, Acting Director General Personal Tax, HM Revenue and Customs, DaveHartnett CB, Permanent Secretary for Tax, HM Revenue and Customs, and John Keelty, Director, FinancePlanning and Performance, HM Revenue and Customs, gave evidence.

Q230 Chair: Welcome again, everybody. We have alot to get through because we want to focus on theparts of the Report that we weren’t able to cover lastweek and we want to deal with the other Report fromthe NAO, on cost reduction in HMRC. It isappropriate to say in the public arena that we aren’tgoing to let matters rest from last week. The CabinetSecretary has asked to see me and I intend to attendthat meeting with Richard Bacon from theConservatives and, I hope, Ian Swales from the LibDems. From there, we will decide what further actionwe’re going to take. We would like Amyas to do somefurther work, and perhaps, Amyas, you’ll describe thatfurther work. There are one or two questions and thenwe’ll move to that. In the first instance, would youlike to describe the work?Amyas Morse: The proposal is that we would putourselves in a position to examine the reasonablenessof some of the larger settlements, probably with thebenefit of some tax advice, and we would aim toreport on that in a confidential—private—session atsome point in future. I know HMRC and GusO’Donnell would co-operate, but it would be helpfulto have that confidential session. That might help tosatisfy a lot of the issues that are still there.Dave Hartnett: Chair, if I may, you asked me aquestion on Wednesday, which I was not able toanswer because Mr Mitchell asked a question at thesame time, and I fear I turned to his question ratherthan yours. The question was whether we would talkto you in confidence. Had I answered, I would havetalked of the sort of confidential discussion justdescribed by Amyas Morse. We are ready for that sortof discussion.Chair: Good.Dave Hartnett: And we will support the NAO in itswork.Chair: Thank you very much. There are just fewquestions arising out of the transcript from last weekthat Stephen, and perhaps Richard, would like to put

Mrs Anne McGuireNick SmithIan SwalesJames Wharton

to you. Then we will move on to discussions of PAYEand other matters.

Q231 Stephen Barclay: Starting with the legaladvice, which you offered to send. We have notreceived that ahead of today’s hearing. Could youclarify when that will be received?Dave Hartnett: The difficulty, Mr Barclay, is that thelegal advice is subject to legal, professional privilege.The Government do not disclose their legal advicepublicly, save in very rare circumstances. We havesaid that we would write setting out the legal position.We have been asked to advance the time by which wedo that to Wednesday lunch time, and we will meetthat timetable.

Q232 Stephen Barclay: Can you advise theCommittee on which areas you sought legal advice?Dave Hartnett: I’m thinking of the legal advice allthe way back to 2009. We were going to cover thewhole piece for you. Basically, it is legal advice ontaxpayer confidentiality.

Q233 Stephen Barclay: Coming on to one of theissues we were trying to get at around the point thatyou are arguing on individual taxpayer confidentiality,Vodafone, in its own regulatory announcement on 23July 2010, said that the settlement comprising the£800 million in the current financial year would bepaid over five years. In your evidence to us last week,you said that time to pay would be granted only if acompany did not have the assets to settle its bill.Given the strength of the Vodafone financial position,why was it given five years to settle its bill?Dave Hartnett: I fear, Mr Barclay, we are back whereI was last week. I cannot talk about Vodafone, but Iam sure we should be able to pick up something likethat in confidence in the context Mr Morse and theChair have described.

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17 October 2011 HMRC

Q234 Stephen Barclay: This is an area that thecompany itself has put in the public domain. It madea statement saying it had five years. You haveguidelines—also in the public domain—that say timeto pay cannot be granted, except if the company doesnot have the assets. Vodafone’s financial position is inthe public domain. I can happily quote its position onits operating profit increasing from £11.8 billion to£12.2 billion, the dividends it was paying and otherpoints regarding its financial strengths. That is all inthe public domain. It seems there is a clear breach ofyour own guidelines, yet that is information Vodafonehas shared with its investors.Dave Hartnett: I am sorry but, even whereinformation has been put in the public domain, Icannot discuss a taxpayer’s position. We will try to doso in the “in confidence” discussions.

Q235 Stephen Barclay: Is it just a coincidence thatthe settlement with Vodafone was reached the daybefore the quarterly announcement by Vodafone?Dave Hartnett: I have no idea. I am sorry.

Q236 Stephen Barclay: So, the fact that thatsettlement was reached with Vodafone, withoutwritten legal advice, the day before the companyannounced its dividend position and its quarterlyreturns—that is just a coincidence, is it?Dave Hartnett: I cannot comment on that.

Q237 Mr Bacon: Mr Hartnett, I want to ask youabout the mistake that you referred to last week. Thatwas what you described as “an issue in relation towhich a mistake was made, because we saw animpediment to dealing with an issue. In fact, theimpediment had been removed. A number of us at themeeting did not know that.” You went on to say, “Itwas actually me who took the mistake to Mr Inglese.”When did you first know that there had been amistake?Dave Hartnett: Probably four or five days after themeeting.

Q238 Mr Bacon: Just to remind us, what was thedate of the settlement meeting?Dave Hartnett: I think 19 November.

Q239 Mr Bacon: So you were abroad when youfound out about the mistake?Dave Hartnett: There was—I need to check. I mayneed to correct when I went abroad. I may have goneabroad a week later.

Q240 Mr Bacon: You were in London on the 22nd.On the 23rd and the 24th you were in Liechtenstein.On the 25th and the 26th you were in Switzerland.That was the whole of that week. The followingMonday, the 29th, you were in India, and you did notget back until 5 December. In fact, you said to us lastweek that you went straight abroad after the meeting.Dave Hartnett: I thought I had done, Mr Bacon.

Q241 Mr Bacon: What I am trying to figure out is—because you say that you identified the mistake—

when did you first know that there had been amistake?Dave Hartnett: I believe—I will have to check—immediately following the weekend after thesettlement meeting, when I was talking to mycolleagues. I think I explained to the TreasuryCommittee that there were actually two mistakes.There was one financial error, and there was a mistakemade in not reporting the case instantly to our high-risk corporate programme board.

Q242 Mr Bacon: When you say not reporting thecase, do you mean not reporting the settlement?Dave Hartnett: Not reporting the settlement, yes.

Q243 Mr Bacon: So you cut a deal but you did nottell anybody? Is that what you are saying?Dave Hartnett: No, no. I am not saying that at all.

Q244 Mr Bacon: I am not trying to be glib—I knowit sounded glib; I am often accused of that, I’mafraid—but that sounded to me like what you justsaid. A deal was struck but it was not reportedimmediately. What does that mean, if not that you cuta deal but you didn’t tell people?Dave Hartnett: A settlement was reached, which allthe HMRC people believed to be within the authorityof the sector lead and the case relationship managerto reach. Over the weekend following the settlement,the sector lead began to realise that it was not withinhis competence to do that. That was the other mistake,and it was referred late to the high-risk corporateprogramme.

Q245 Mr Bacon: Right. How late? How much laterwas it referred?Dave Hartnett: Days.

Q246 Mr Bacon: And why wasn’t it within hiscompetence?Dave Hartnett: Because he had not fully consultedthe other areas of our business interested in the issues.

Q247 Mr Bacon: That sounds familiar, actually—notconsulting people who are familiar with the issues. Sothat was the second mistake: the deal was not reportedimmediately. The first mistake was what youdescribed as a financial error.Dave Hartnett: The NAO described it as such, but Iagree with the description.

Q248 Mr Bacon: That was also the legal error inthinking that you could not charge interest, was it?Dave Hartnett: Yes.

Q249 Mr Bacon: Whereas you actually could. Incoming to the conclusion that you could not chargeinterest, did you consult lawyers about that?Dave Hartnett: No.Mr Bacon: You didn’t?Dave Hartnett: No.

Q250 Mr Bacon: Since it is very common to chargeinterest—it is standard practice to charge interest—

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wouldn’t consulting lawyers on that question havebeen the obvious thing to do?Dave Hartnett: There are two things to say with that,Mr Bacon, one of which I touched on last week. I hadoverseen the 2005 settlement of the issues, and I knewof the legal impediment to collecting interest. Mycolleagues were in a similar position of knowing, andso was someone from the taxpayer. We were allconfident that we knew that. The dispute that was inthe hands of the lawyers was over the principal sum;it was not a dispute about interest.

Q251 Mr Bacon: Hang on a minute. The legalimpediment that you thought you were confidentabout was a supposed impediment to the charging ofinterest.Dave Hartnett: Yes.

Q252 Mr Bacon: But the 2005 settlement that youwere talking about was several years previously.Dave Hartnett: Yes.

Q253 Mr Bacon: Would it not have been standardpractice to revisit why it was that you were soconfident about the nature of that impediment?Dave Hartnett: Well, because I had not been runningthe case, but those with me had, and between us—and I am very sorry about this—we all believed theimpediment still to be there.

Q254 Mr Bacon: But you actually wrote toGoldman Sachs—Dave Hartnett: I don’t think—

Q255 Mr Bacon: Sorry, not you. HMRC wrote toGoldman Sachs and told it that the interest wouldrun—that the interest would continue to roll up andbe due if it did not settle with the other 21 companies.Dave Hartnett: I’m sorry, Mr Bacon, I was unawareof that letter until you mentioned it to me.

Q256 Mr Bacon: I bet you found out afterwards.Dave Hartnett: I might have.

Q257 Stephen Barclay: At our previous hearing yousaid that you could not recollect whether a detailednote was taken at the meeting. Have you now had anopportunity to check?Dave Hartnett: I have not yet had a chance to check,Mr Barclay.

Q258 Stephen Barclay: You have not had a chanceto check?Dave Hartnett: No, not yet, but I will do so.

Q259 Stephen Barclay: When?Dave Hartnett: Tomorrow, if I can.

Q260 Stephen Barclay: In your evidence to us lastweek, you said, “We keep very detailed records,indeed.” It’s surprising that you felt it necessary tophone the global head of tax at Goldman Sachs tosummon him from New York and a meeting recordwas not kept.

Dave Hartnett: Mr Barclay, I know there is a meetingrecord, which HMRC has, that was prepared by thetaxpayer. I do not know whether there is an HMRCrecord as well.

Q261 Stephen Barclay: But these were seniorpeople at the meeting. When the mistake wasidentified on the Monday, was a note circulated tolawyers at that stage?Dave Hartnett: I spoke to Mr Inglese to seek hisadvice. I do not know whether he circulated a note; Icertainly did not.

Q262 Mr Bacon: When did you speak to MrInglese?Dave Hartnett: I think on the Monday, but I need tocheck, Mr Bacon. I’m sorry.

Q263 Mr Bacon: You think it was the 22nd, afterthe Friday.Dave Hartnett: Very soon after, yes.

Q264 Mr Bacon: On the interest and the nature ofthe mistake, you prefaced your remarks about theinterest by saying that you were involved in the 2005deal. But it was in October 2005 that HMRC hadwarned that the interest would continue to accrue. Itdefeats me how, in apparently being so confident thatyou could not charge interest and therefore it was notsomething that you seriously thought about doing, therecord showed the exact opposite. You had warnedthem about the fact that you would continue to chargeinterest, and yet you, or the people you were with, didnot revisit the question. If you had, you would havediscovered that there was not an impediment. That isthe whole point.Dave Hartnett: I think, Mr Bacon, that if the NAO isgoing to look at the matter, it should all come outthen, because there is much more detail to come out.

Q265 Stephen Barclay: You also said, in answer toone of the questions last week, “normally we are ableto intervene to correct them”, as in mistakes, “becausethey are spotted by the process. I spotted the mistakehere.” If the mistake was spotted as quickly as theMonday following the Friday meeting, why was it sobinding on HMRC that you were not able to rectify itas would be normal practice?Dave Hartnett: I am not going to be able to answerthat in public, Mr Barclay, but we will be able to dealwith it through what Mr Morse is going to do. But letme just say this: there were discussions with thetaxpayer shortly after we discovered the interest andthe governance error.

Q266 Stephen Barclay: But you accept that legallyyou were not bound by that decision. Legally youcould have rectified it.Dave Hartnett: I received advice that we could regardourselves as bound by it, or not bound by it.

Q267 Stephen Barclay: In other words, you were notbound by it.




Q268 Mr Bacon: Mr Barclay has put it as perfectlyas one could. You have the option of either going backand revisiting it and saying, “Yes, we will charge theinterest” or accepting that it was a done deal, and youwent with the “It’s a done deal” option, although youdid not have to. That is correct, isn’t it?Dave Hartnett: Mr Bacon, I have just been passed anote by my lawyers to tell me that this is taxpayerconfidential and will need to be dealt with in thereview of the case rather than now.

Q269 Mr Bacon: I think we probably will not getmuch further today, and I look forward to the CAG’sfurther report. It does seem very odd that not only didyou choose the second option of accepting it as a donedeal when you could have gone back and revisited itand fixed it, but Mr Inglese signed it off in that way,and so did two tax commissioners. That must haveresulted in a negative impact on the revenue. The legaladvice was that it need not have been that way. Thatseems very odd.Dave Hartnett: If I may, one final comment from me:“must have” may not be right. Mr Morse explainedother possibilities last time, and there is more to thisthat will come out.

Q270 Chair: Okay, we are going to come back to itafter both the NAO work and our discussions with theCabinet Secretary. We will probably expect him togive evidence to us anyway, although he was clearlyunable to do so this afternoon.Right, PAYE. I do not know whether you are dealingwith this, Mr Hartnett. One issue slightly concerns us.You have stepped up to be acting permanent secretaryin the circumstances, which we completely appreciate.Are you able to do all this work of sorting out all thedeals that you get involved in, and making sure thatthe rest of the Department is functioning well?Dave Hartnett: I am doing my very best to do that,Chair. It is not the first time that I have stepped up. Iam Lesley Strathie’s second permanent secretary—Iled the Department for a year once before while tryingto do other things. I am doing my very best.

Q271 Chair: We might come back to that, becausethere are some concerns about your cost cutting.The PAYE story is a better one than when we lookedat it six months ago and we welcome that—it is abetter place to be in. Looking at it in that context of awelcome improvement, let me briefly deal with theissues that remain. I am concerned that on page 9, inparagraph 26, we are told by the NAO that you havenearly 7 million individual records that are awaitingreconciliation, which is still 15%, which is one heckof a lot. When will you have done that reconciliation,and what is the impact of those figures on the financialloss to the taxpayer?Dave Hartnett: I’ll ask Stephen to pick that up, ifI may.Stephen Banyard: Under the old pay-as-you-earnsystem we had to manually reconcile 16 million or 17million records a year; under the new one, we expectto have to reconcile 3 million to 4 million a year, sothere is a huge reduction in the amount of manualwork we have to do. The 6.7 million is the number of

cases that needed to be looked at by our staff this year.We are 39% into that and we expect to havecompleted it this year—on schedule.

Q272 Chair: In this financial year?Stephen Banyard: Yes.

Q273 Chair: Can you update the Committee on thetotal income tax forgone because of the delays anddifficulties in introducing NPS? Have you got thatfigure or can you put it together for us?Dave Hartnett: I have got some numbers for you. Forthe years 2004–05 and 2005–6, we have only anotional figure. The Committee may remember thatwhen Lesley Strathie was here she explained thatnotional meant the largest amount, but that we wouldnot have necessarily collected it all. It is important torealise that. That was a figure was £150 million. In2006–07, the amount forgone was of the order of£100 million.

Q274 Chair: We’ve got £500 million.Dave Hartnett: Again, I think that is the notionalfigure. Lesley was at pains to explain that the actualamount that we might have collected in the summerof 2010 stood at £100 million, and by November 2010it was down to £25 million.

Q275 Chair: What do you in the NAO feel morecomfortable with looking at? There is a heck of adifference between £500 million and £100 million.John Thorpe: Both the figures are included inparagraph 3.11 of the report. The £500 million wasthe notional amount at the time, in 2006–7; the £100million was based on the Department’s assessment.

Q276 Chair: Whose notional figure at the time?HMRC’s or yours?John Thorpe: It is from HMRC records—from thedatabase of open cases. The £100 million is theestimate of what could have been collected at the startof the recovery exercise in June 2010.

Q277 Chair: So what could have been collected isdifferent from what was owed.John Thorpe: Yes, because had HMRC acted at thetime, there was a potential to collect £500 million.

Q278 Chair: Okay, so let’s take £500 million. So far,we are at £650 million—go on.Dave Hartnett: There is a real problem with £500million, because that is not what could have beencollected; the £100 million is what could have beencollected.Chair: No—yes. It is a question of what could andwhat should—what was owing and what could havebeen collected—there is a difference.

Q279 Ian Swales: For example, that includes yourchanging the de minimis rules, I believe.Dave Hartnett: I am coming to that next, Mr Swales.The £500 million includes every penny—

Q280 Chair: That should have been paid.




Dave Hartnett: That should have been paid, but notevery penny could have been collected. It would havebeen cost-inefficient to do so.

Q281 Chair: I accept that. I understand that. Ofcourse, in all these figures we do not have the—Dave Hartnett: The £300 threshold we introduced for2007–08, 2008–09 and 2009–10, involved the sum of£266 million.

Q282 Chair: Right. I have another figure of £136million of underpayments on the 2007–08 cases, notworked or collected.Stephen Banyard: That is down to £126 million now.

Q283 Chair: That is down to £126 million from£136 million. Then I have another figure of £41million for recovery of tax forgone followingsuccessful taxpayer claims of remission under extra-statutory concessions.Dave Hartnett: That is correct.

Q284 Chair: Then we have an unquantified amount,which you might like to quantify, of tax forgone fromsome 250,000 pensioners, where their tax codes failedto reflect their state pension between 2008 and 2010.Dave Hartnett: We do not have a figure for that yet.I think that is correct, Stephen?

Q285 Chair: Do you have a ballpark figure?Stephen Banyard: All of these estimates are to anextent unreliable, but the figure for the pensioners’ taxis so unreliable that neither we nor the NAO could putit into the report.

Q286 Chair: Presumably, there will be another figurefor these 6.7 million accounts that you have yet toreconcile, of which you have done 30-something percent.Stephen Banyard: No, we expect to put all of thoseinto charge, because they are in time. They are for2008–09 and 2009–10, and we are working them sothat they will be in time.

Q287 Chair: So, we are talking about, in total, £1.2billion or thereabouts.Dave Hartnett: If the notional figure for 2006–07 istaken, it comes to that order.Chair: That is a shocking loss to the taxpayer.

Q288 James Wharton: Do you think that, givenwhere we are now and what we now know of howthings have progressed, it was the right decision toincrease the de minimis limit in order to streamlineadministration, but obviously taking on the cost ofthat?Dave Hartnett: I will bring in Stephen in a moment.We would have had real difficulty if we had not donethat. It was a case of managing the work to make surethat we got the work done before the time limits ranout and that we caused less distress to taxpayers thanwe might otherwise have done.Stephen Banyard: What the Department faced, as itbrought in the NPS system late, was a concertina ofwork. You cannot carry that bow wave forward for

ever; you have to unwind it and start to operate thetax system in real time. By introducing the £300tolerance, the Department cut out 40% of theadjustments, but only 8% of the yield. It was on thatjudgment that we took that decision.

Q289 James Wharton: One of my concerns isrelated to discussions that I have had with HMRCemployees who are my constituents about how theywork. One of the issues that has repeatedly beenraised with me is the lack of flexibility when data areinput into systems. For example, when they enterthings from people’s tax returns, even if they know afigure is wrong, in many cases they have to enter thatfigure as it appears on the tax return in order that itcan be picked up and corrected later.My concerns are twofold. First, can you explain—ifpossible, I would be grateful if somebody could sendme the guidance that HMRC employees use—whether, if they have a figure that is wrong, they knowwithin what bounds they are allowed to change it orto raise such a matter at the point of input? If there issome guidance on that, I would like to see it.My other concern is that a judgment was made that,because there was a backlog of errors, the value ofwhich added up disproportionately to the work that itwould take to chase them up, the Revenue decided notto chase people beyond that de minimis limit. If whatthese constituents are telling me is true—that errorsare still being input as data go forward, with the ideabeing that they are picked up later—is there a dangerthat this will happen again, perhaps on a smaller scale,because where the systems are not in place earlyenough in the data input process, we create errors thatcould have been resolved? Therefore, we may findourselves making such a judgment again, saying,“Well, we have all of these errors backed up, so wewill increase the limit. It doesn’t cost that much”.However, we would be building in a system in whicherrors are commonplace—I am sorry that that is along question.Stephen Banyard: The general answer is that I amvery mindful of the fact that data quality is extremelyimportant, and therefore, with pay-as-you-earn and theRTI programme, we focused on getting data qualitybuilt in from the start. In relation to your point—Iknow our staff are concerned about this matter—self-assessment is a “process now, check later” regime.Just because the figures have been put in does notmean to say that we have shut our eyes to them. Thepeople who do the checking then receive a list ofexception cases, or cases where there is reason forconcern, and we can then take a risk choice on whichones we decide to pursue. We have resource to pursuecompliance, and we have to use it to best effect.

Q290 James Wharton: The way that the process isworking is at the heart of my concern. I am being toldby people—and you have acknowledged that staff areraising this with you internally—that they are puttingin data that they know are wrong, and people feelthat they do not have sufficiently clear guidance orflexibility to correct that at the input stage. Iunderstand what you are saying, which is that you putthe data in and then check them. You have just said




now, however, that those that stand out get checked,but how many are being missed? And, when you takethe judgment on which are worth pursuing, with howmany are you saying, “We won’t pursue that”, but hadthe data been put in right in the first place, it wouldnot even have been an issue? I am concerned that—although on a much smaller scale—on a regular basis,the problem that we have seen with this process isactually being built into the system.Dave Hartnett: Mr Wharton, may I help? Werecognise this issue. Our staff have raised it with us,certainly in the past. The extent of electronic filingnow, particularly for self-assessment and byemployers, and the electronic checks that happenthere, throw things out much faster when they areevidently wrong. Those are put on to work lists andwe address them. With nearly 80% of individual taxreturns and a huge proportion of employer returnsnow filed electronically, we are detecting these thingsautomatically. It does not excuse the past, however.

Q291 James Wharton: Do you believe that yoursystem, as it is at the moment—accepting reasonableerrors and problems that will be thrown up—isworking sufficiently well, and therefore, you will notbe revisiting it, saying, “We are either going toincrease the de minimis limit”, or “We are not goingto chase those and actually try to get that money in,because there are so many of them, or because thereis such a backlog”? Do you believe it workssufficiently well to avoid being in this position againvia a different means?Dave Hartnett: We think there has been a sufficientlysignificant improvement for us to be able to reducethe de minimis back from £300 to £50. Certainly, oncurrent performance levels, we do not expect to havethat problem, but we are watching it very carefully.

Q292 James Wharton: That was my last question,but for clarification, if you could send us a copy ofthe guidance that staff are given on when they canamend at the data input step, that would be muchappreciated.Dave Hartnett: Of course.

Q293 Chair: I have two other areas that I want topursue—I am looking around to see if anyone elsewants to. One is that on figure 9 on page 36, you havenow calculated that you have £1.9 billion inoverpayments by individuals, and £1.1 billion inunderpayments by individuals. Am I reading thatright?Dave Hartnett: That’s £1.1 billion—I can’t find it.Chair: Is that £1.1 billion by individuals?Dave Hartnett: By individuals.

Q294 Chair: How confident are you that you will getthat money in? What proportion of it?Stephen Banyard: We are fairly confident.

Q295 Chair: What—100%?Stephen Banyard: Yes. Within the normal collectionparameters, of some people going missing, somedying, and some becoming insolvent—within thosesorts of limits. These are within time limits, and we

would expect to collect them. The way that the pay-as-you-earn system works is that at the end of theyear, most people—85%—will have paid the rightamount of tax. Some will not, for very good reasons.Usually, it is because the taxable benefit that they getin the year has changed. We make a correction at theend of the year and we collect the money normally inthe following year.

Q296 Chair: You do not normally have this size ofcorrection, do you? Over £1 billion a year correction.Stephen Banyard: It is not £1.9 billion—Chair: Overpayments—which you have to pay back.Stephen Banyard: That is cash.Chair: That is cash, but £1.1 millionunderpayments—is that the sort of size we get everyyear?Stephen Banyard: That is cash too. £1.1 millionunderpayments, can I—John Thorpe: These issues cover two years, ofcourse, because the Department had to reconcile twoyears together—Chair: And they have not completed thereconciliation—there is another 15% to come.John Thorpe: Yes, so it captures two years.

Q297 Chair: But so far? What is the size usually ofthe underpayments?John Thorpe: I do not have a number for that.

Q298 Chair: Do you?Stephen Banyard: For?Chair: Underpayments.Stephen Banyard: Yes. For this year or last year?Chair: Usually.Stephen Banyard: Usually. We are operating a newsystem but last year the overpayments were 5.6million (customers). We have completed theoverpayments—

Q299 Chair: This is 2011–12? Sorry, 2010–11.Stephen Banyard: For 2010–11 the number ofoverpayments is half what it was last year. It was 2.3million (customers with) overpayments.As for the underpayments, we are about to startissuing. We estimate—I emphasise “estimate”because, until we have worked through all the records,we will not know the position—that on a like-for-likebasis, compared with last year and with the £300 limit,there will be half as many. But, because we havelowered the limit from £300 to £50, there will be thesame number. So there will be about 1.2 million—

Q300 Chair: Billion—we are talking billions here.Stephen Banyard: 1.2 million adjustments, and theestimated size of the adjustment is about a half ofwhat it was last year.Chair: Oh yes, I see what you mean. Anne.

Q301 Mrs McGuire: May I move us on to some ofthe work that you are currently preparing for, whichis the linkages between the child benefit and the newsystems, and indeed the universal credit? I think I sawa headline recently—but I never believe everything Iread in the newspapers—that indicated that the




Treasury effectively thought that the introduction ofthe universal credit was just not achievable, certainlywithin the time scale and the financial limits that hadalready been set. Would anyone like to proffer anopinion on that particular comment? Was it just a bitof fluff in the newspapers? Was there a genuinedispute between DWP, the Treasury and indeedHMRC, or were you just piggy in the middle betweentwo major Departments?Dave Hartnett: Stephen is closer, as the SRO for realtime information, but both Stephen and I sit on aministerial committee dealing with this, and I am notsure I would call it a bit of fluff in the media but,certainly, we did not recognise from the discussionsthat we had been involved in the descriptions thatappeared.Stephen Banyard: We cannot comment on theuniversal credit programme because that is for DWPto comment on. What I can say is that I—Mrs McGuire: But you are managing it.Stephen Banyard: I am responsible; I am accountablefor the real time information programme, whichprovides the—

Q302 Mrs McGuire: So you are crucial to thedelivery of the universal credit.Stephen Banyard: Absolutely.

Q303 Mrs McGuire: Because if your information iswrong, then lots of people out there are going to findthemselves in dire financial difficulties.Stephen Banyard: And we are very mindful of that.

Q304 Mrs McGuire: I do not know whether or notthe child tax credit legacy still looms hard and youhave a big sign up saying, “Please do not repeat whathappened with the child tax credit situation.”Stephen Banyard: We will put every emphasis thatwe can, which we are doing, on collecting andtransmitting accurate data—

Q305 Chair: You’re not doing anything on real-timeinformation at the moment. That is one of the thingsthat the Report says. The Report says that, becauseyou have been trying to sort out both the PAYEnumbers that we all get—whatever you call it—andthe returns, you have done nothing on real-timeinformation.Stephen Banyard: No, that is incorrect, Chair. Wehave a major programme running. I do not knowwhere that comes from—Chair: My reading of the Report.Stephen Banyard: But we have a substantialprogramme running on RTI, and I can reassure you—Chair: You might have a policy, but your guys arebusy pursuing 2008–09 and 2009–10.

Q306 Mrs McGuire: Can I ask the NAO why? Arewe misinterpreting what is in the Report?Stephen Banyard: Yes.

Q307 Matthew Hancock: Which bit of the Report?John Thorpe: The commentary on RTI is inparagraphs 3.38 to 3.41. We describe the programmeand the time line in terms of how the Department is

implementing RTI, so we just comment on theprincipal milestones. Our commentary is principallyaround the challenges around data quality and howthose are being addressed. My understanding is that itis a separate programme from the work that is goingon around the NPS stabilisation.

Q308 Ian Swales: It says in 3.41 that the pilot phaseruns from “July to October”—so it should becompleted in two weeks’ time—“prior to fullimplementation from November 2011.” So how arewe doing?Stephen Banyard: Can I help? The first thing to sayis that we have done a lot on the new pay-as-you-earnsystem to improve data quality, and you will have readin the Report that the Department has repaired 11million records. They were not wrong, but we neededto check to make sure. As a result of that, the taxcodes that we issued this year—the Committee willbe concerned with this—were very accurate comparedwith the inaccurate codes from the year before. Weachieved an accuracy of over 98%.Another key indicator, and one that DWP areinterested in, is how well the data coming in fromemployers matches into our systems, and whether itwill drop into the right customer account. We havebeen working on that over the past two or three years,and we have increased its accuracy, in successiveyears, from 97.3% to 97.8% to 98.3%. The acceptancecriterion for universal credit is 98%, so we havealready achieved what universal credit needs from us.We are not content with that, and we have set up aseparate data quality programme within the RTIprogramme.We are particularly looking to find out where theproblems are arising, and we have developed a toolthat enables us to look by employer to see where theproblems are. Over the past three months, we havepiloted—this is what you are reading in the Report—the introduction of customer relationship managers,who will go out and work with employers and talk tothem about data quality and its importance.Most employers need good quality data, just as we do,and they very much understand our need for it, butdifferent organisations have different data needs. Forexample, you may work for the House of Commonsand they have you down as Mrs A McGuire, but onour records you would be Mrs Anne McGuire, andsomething as simple as that can cause problems. Weare working through with employers. We have a listof the employers who are likely to cause us mostproblems and we are working with them in acollaborative way to improve our and their data.

Q309 Mrs McGuire: The thing that identifies mewithin the system is my national insurance number, sowhy do I even need to have my name there at all? Ido not want to put it into the public domain at themoment, but I can give you my national insurancenumber off the top of my head—I have had it for along time.Stephen Banyard: And you are wonderful, but noteverybody can do that.




Q310 Mrs McGuire: All right. I am being a bitfacetious here, but people do carry their nationalinsurance numbers, and, frankly, I never cease to beamazed—I do not know about my colleagues—thatwhen you ask a constituent for their national insurancenumber, they can just run it off the top of their head.Many people do know it. Is that not the identifier, andnot whether I am Mrs Anne or Mrs A—or, indeed,Mrs A McQuire, which I sometimes get and which iseven more confusing?Dave Hartnett: It is the primary indicator, and manypeople do exactly what you do, Mrs McGuire. Theyknow their national insurance number off by heart.Others no longer know their national insurancenumber. Others still have been given temporarynational insurance numbers at some stage. You beginto see how the confusion can arise. Our challenge isto cleanse all that.

Q311 Ian Swales: Just on this very point, in dataquality terms, you talked about an acceptance criteriaof 98%, so that is 2% error. How many errors wouldthat be if you hit your acceptance criteria? A million?Stephen Banyard: The acceptance criteria are arounddata hitting the account first time. We then try tomatch it using our staff. The matching criteria that weuse are normally name, NI number, address, date ofbirth and gender. It is important that we can matchaccurately. While we are not content with 98%, it is agood starting point.

Q312 Mrs McGuire: Can I come back on the secondpart of my question, which was about the child benefitchanges? What do you perceive to be the majorchallenges in implementing a real-time database toassess whether an individual or family are entitled tochild benefit, under the new system that is coming in?Dave Hartnett: I think, Mrs McGuire, that the startingpoint is this: we have got to make system changes todeal with that, and we have until February or Marchnext year to understand what those changes are—oncethe policy design is completed, which is in the handsof our colleagues in the Treasury. It is hard to answeryour question today. We do not envisage any specialdifficulties with real-time information and childbenefit.

Q313 Mrs McGuire: That does not strike me as along read-in time to introduce something that willmake a significant difference.Dave Hartnett: No, we have been thinking about it.

Q314 Mrs McGuire: You’ve been thinking about it.Dave Hartnett: We have been thinking about it for along time. I hope we understand what the optionsmight be, but there are still decisions to be made.

Q315 Chair: But, to be clear, you have done no in-year changes. Para 23, page 8 of the NAO Report saysyou have put the resources into the recovery work. Itstates: “This recovery work was extensive, coveringover 11 million records…A consequence of divertingoperational resources to recovery is that some in-yearchanges to individuals’ records have not beenprocessed”.

Dave Hartnett: But they are in-year changes toindividuals’ pay-as-you-earn records, which,currently, will have nothing to do with child benefit.

Q316 Chair: But they could have something to dowith their tax. There may be overpayments orunderpayments.Dave Hartnett: Indeed.

Q317 Chair: So it will add to your overpayments-underpayments problem.Stephen Banyard: Nobody will pay the wrong tax atthe end of the year.

Q318 Chair: Why? Because you will do in-yearchanges? This says that you are not.Stephen Banyard: We want to do in-year changes.

Q319 Chair: But you are not.Stephen Banyard: We are in some cases. May I givesome context? The position we have faced is thisconcertina of work at the start. In-year informationcomes to us from three sources: people write to us—some 9.5 million letters a year—around 16 millionpeople telephone us, and the computer throws upitems for us to look at. Perhaps I should say this: 12months ago we had a backlog of post, which wasnoted by the Committee. We are fully up to date withour post here. We have been working on it over thesummer. Our postal position is up to date.

Q320 Chair: What is your definition of “up to date”,out of interest?Stephen Banyard: We have only five days’ post onhand.

Q321 Chair: So do you reply within five days or doyou open it after five days?Stephen Banyard: No. People will start replying to aletter, if it is urgent, at the five-day point. It will goout then.

Q322 Chair: When will someone get a letter? Thatis what I am really after. That is what we, and thepunters, care about.Stephen Banyard: You ought to get a letter wellwithin the service standard period.

Q323 Chair: Which is what?Stephen Banyard: Three weeks.

Q324 Chair: Right. Do you think that you are there?Stephen Banyard: We want to do better than that, butwe have got to that position. People will begin to seethat in the autumn, because we have only just gotthere. We have also improved the telephone service.What we are left with are the work-managementitems, which are quite a mixed bag. Some of them areabout data quality, which we have been talking about.For example, we may have a record that matches onfour of the five items, but perhaps a character in thename is wrong. We will match the record and throwup a work-management item and ask whether it isright or wrong. It may be a compliance check, as wediscussed earlier, such as a repayment. The system




will ask whether we want to check it. We set a levelor criteria for checking.A lot of those work-management items are aboutinformation management. Some of those items relateto taxable benefits, such as company-paid healthinsurance or company cars, that have changed duringthe year—we may not have worked through the itemsthat come from the computer this year, so we will pickthem up at the end of the year—but that is the finalpiece of the jigsaw of trying to get pay-as-you-earnback up to date. We are carrying out a major reviewto address those work-management items and todetermine which ones we actually need.

Q325 Mrs McGuire: My final question is about theintegration of child benefits into the real-timeprogramme.Say that I am a school teacher with three children andthat I get promoted in August, which takes me overthe threshold. When will you catch up with me—if Imay put it in those terms—and withdraw my childbenefit?I bear the scars of the child tax credit, which leftpeople with horrendous bills. I remember someone,although they were perhaps not in your position, MrHartnett, explaining that there is a difficulty with theculture of the HMRC because it is only used tocollecting money, rather than giving money out. Whatis in front of those constituents who, during the taxyear, flip over the point at which they are no longerentitled to child benefit? Potentially, significant sumsof money are going to be withdrawn.Dave Hartnett: I agree. If we know that the childbenefit needs to be withdrawn, there will be an in-yearchange; if we do not know, it will be dealt with in thefollowing year.

Q326 Chair: You won’t force people to pay it back?Who loses out in Anne’s example of a woman beingpromoted in September without the local authoritytelling you until the following April?Dave Hartnett: If the woman does not contact us totell us of the change, there will be a tax charge for theyear of promotion, but, where it is appropriate to doso, we will encourage people to take themselves outof child benefit.Chair: That is very unclear. Anne’s example is quitegood.

Q327 Stella Creasy: Flipping it round the other way:what about the person who breaks up with theirpartner and becomes entitled to child benefit? Howwill you deal with that?Dave Hartnett: If we know that has happened, and ifthe person has come out of child benefit, we will putthem back into it.

Q328 Stella Creasy: How quickly can you operatethat system? It sounds as if you will not make anadjustment until the following tax year for people whoare no longer entitled to child benefit. How quicklywill you be able to assess whether someone is entitledto child benefit?Dave Hartnett: If someone contacts us, we will beable to make such an assessment in a very short time.

Q329 Stella Creasy: What’s a short time?Dave Hartnett: Weeks at the maximum; perhapseven immediately.

Q330 Stella Creasy: So how can you do it if theyare entitled, but it will take longer if they are notentitled, therefore?Dave Hartnett: Because we’re more likely to find outif someone is entitled than if they are not entitled. Ithink that’s how it will happen.

Q331 Matthew Hancock: May I push you a bit moreon real-time and the change programme around that?You have described how you are catching up with thebacklog within the existing system and how you areimproving the data, to go up from 97.3% to 98.3%.Operationally, it is probably better described as a2.7% error rate going down to 1.7%, because one ismuch bigger, but it’s the proportion that matters. Butthere are other elements, particularly the link to thenew universal credit, that are part of the changeprogramme. How is that work proceeding?Stephen Banyard: The RTI programme is on trackand we are confident that we can deliver on time. Wehave hit all of our recent milestones. We are runninga 12-month live trial, and we have run workshops tostart preparing 320 volunteer employers. We are ontrack to start the pilot in April, and it will run for 12months, which will enable us to test the system. If—

Q332 Matthew Hancock: Excuse me. Are the 320people all in work?Stephen Banyard: I said 320 employers, representingmore than 1 million taxpayers.

Q333 Matthew Hancock: Do you also includeunemployed people in that trial?Stephen Banyard: This is a trial of the operation ofpay-as-you-earn.

Q334 Matthew Hancock: The real-time pay-as-you-earn, rather than the DWP’s end of it?Stephen Banyard: Yes. HMRC is responsible fordelivering real-time pay-as-you-earn information.

Q335 Matthew Hancock: But you are also jointlyresponsible for delivering a real-time link-up with theuniversal credit.Stephen Banyard: Indeed, and we will provide theinformation to them through that linkage.

Q336 Matthew Hancock: And the milestones onthat interface?Stephen Banyard: Yes, we are building that, and weare on time with all our IT.

Q337 Matthew Hancock: How would you describethe working relationship with the DWP team that isdoing the same?Stephen Banyard: First class.Matthew Hancock: I thought you might say that.Stephen Banyard: I would, and it is. Most ofHMRC’s programmes require us to work with a lot ofstakeholders. The programmes that I have beeninvolved in require me to work with tax agents,




software manufacturers, employers and variousgroups. You don’t deliver programmes unless youwork well—or try to work well—with those groups.You need to do three things: first, share goals—youneed to know what you are trying to do and agree it.Secondly, you need good working mechanisms, suchas steering groups. We have cross-representation, wehave seconded people across each way and we meetregularly. Thirdly, you need good personalrelationships and you need to trust each other. Wehave, from the outset, set out to build good personalrelationships with the DWP team. Relationships aregood.

Q338 Ian Swales: Without wanting to go back overthe ground that Mr Wharton covered earlier, we startfrom a position where anecdotally, your staff are noteven allowed to, when they are inputting data, takeinformation that they can see in front of them and useit to get the data right. If we are expecting to move toa situation where all these benefits and credits cometogether—my question is about the management andgovernance of it, not just the systems.Taking the points that Mrs McGuire and Ms Creasywere making, it ought to be automatic in the futurethat you know when someone has reached a certainpoint in the tax system and then benefits change, andvice versa. If it isn’t automatic, this whole new systemis not going to work. My question is not just aboutwhether the systems will do it, but what you are goingto do about management, governance and control.Who is going to make the decisions and communicatethese changes?Stephen Banyard: Can I take the child benefit part ofthe question first? Real-time information will help uson that, because even if you don’t phone us up andtell us, we will spot that your income on a monthlyrate has gone up and may have tripped the higher rateboundary. We would have governance around thosesorts of things, perhaps to go in and ask the employeror you, “Have you crossed the boundary?”

Q339 Ian Swales: But that’s exactly the point. It allsounds extremely woolly and gentlemanly. The pointis that something has changed and you know it haschanged. Aren’t you going to do something to avoidoverpayments and underpayments? “We mightperhaps let you know or talk to your employer”doesn’t give me the warm feeling that the new,dynamic real-time system is going to have the rightmanagement structure around it.Stephen Banyard: I assure you that it will. Wehaven’t operated a real-time system. We have to getused to it.Mrs McGuire: That’s what worrying andconcerning us.

Q340 Stella Creasy: It’s the postbag we’re going toget from the family that breaks up, but which maystill be under the same roof for a period or can’t proveto you that they have broken up; or perhaps from aperson who gets promoted but doesn’t get their salarystraight away. All those people will come to us in oursurgeries and will be looking to us to help them sortout what’s going on with you guys.

Stephen Banyard: I understand that, but those are not‘hard’ facts. The real-time programme, if you bringthat into it, gives us a facility to be able to spot thosecases and intervene.

Q341 Ian Swales: I don’t necessarily expect you toread people’s minds or understand everyone’s socialsituation, but you have to be able to see data movingon tax and credit. Otherwise, the universal creditsystem isn’t going to work. We need to have a systemthat works. Are we going to trip up over the fact thatmore than one Ministry is involved, for example, oris that all going to get sorted?Stephen Banyard: I hope we do not trip up over twoMinistries being involved. We have put very goodgovernance, which has been externally examined,around the programmes. As we move intoimplementation, that governance will have to adapt aswe face new situations.

Q342 Ian Swales: It is the operational governance Iam talking about. I am not minimising the issue ofgetting the systems in place—we all know that isgoing to be massive. But assuming success, are weconfident that we will have operational governancethat is fast and avoids the situations we have beentalking about?Stephen Banyard: There will be and I accept thepoint. In a real-time world we will need to respond inreal time to those sorts of situations.

Q343 Stephen Barclay: This really follows on fromMr Swales’s questions. Of the 54 projects in thechange programme, how many have started?Dave Hartnett: Twenty-four have got—

Q344 Stephen Barclay: You are working on thebusiness plans for 24, so they have not really started,have they? It is just the initial work.Dave Hartnett: No, they have started, Mr Barclay.John may be able to help.

Q345 Stephen Barclay: It says, “preparing fullbusiness cases for the 24 projects to deliver the £964million.” It is a really simple question. We have 54projects in the change programme.John Keelty: I cannot give you the numberimmediately, although it may come. For example, onsome of the reinvestment of the savings, we havealready started recruiting people into various areas sothat we can start those compliance projects going. Wehave already started to bring in more yield as a resultof the reinvestment of the savings we are making thisyear. There are a number of projects that we havestarted this year. It is not the case that we are justplanning. Yes, we are planning for some that willmaterialise in 2013–14 and beyond, but for those thatwe need to get going now, we are well on the way todoing that.

Q346 Stephen Barclay: Sure, but that was not reallymy question. I appreciate that for 24 you are workingout a business case, but what I am saying is that by2015 you have to deliver 54 change programmes. Thatseems quite a lot for a department that has business




as usual and has other issues to address. Perhaps youcould send us a note about how many of those havestarted. How many of those that have started are off-track?John Keelty: Again, I am not aware of any but I donot have the precise details. We monitor these reportson a monthly basis, so what we get each month fromthem is to see their current status. As we work throughthem, there will be some that will be rated “green”—absolutely perfect, no problems—and there will besome that will be rated “amber”, where we need to domore work. I have run programmes before and that iswhat happens.

Q347 Stephen Barclay: I fully appreciate that youhave ratings; hence my question. Surely seniormanagement has a sense, if you monitor it monthly,of how many of these 54 change programmes havestarted. We have less than four years to deliver them—it seems a lot of work—and it seems odd if seniormanagement does not even know how many havestarted and how many are already behind schedule.John Keelty: We have just undertaken a mid-yearreview of the change programme and the conclusionwe got from that is that we do not need any radicalredesign or radical changes. Everything is moving inthe way that we would expect it to move at this pointin time. That does not answer your numbers question,but senior management at this time have seen thatmid-year review and are comfortable that it isprogressing in the way that we would expect it toprogress.

Q348 Stephen Barclay: Sure, but a 25% cost savingand those 24 projects are just under £1 billion, whichsuggests more than a bit of tinkering and modification.Perhaps we could look at external spend. Fifty-fourchange programmes suggests that you may need someexternal resource. I am very conscious that theCabinet Office has strict controls around externalspend. How much are you budgeting this year tospend on external resource for these changeprogrammes?John Keelty: For consultancy we are budgeting about£5 million.

Q349 Stephen Barclay: So £5 million onconsultancy. What about other professional support?John Keelty: We have, of course, outsourced our ITdevelopment. So that is also being spent outside. Wehave outsourced our accommodation so we have quitelarge amounts that go out through that.

Q350 Stephen Barclay: Okay. So legal spend, thatsort of thing, do you have a total budget in mind todeliver? I am asking specifically about the changeprogrammes because again, in previous hearings MrsMcGuire and Mr Swales talked about staff morale inHMRC. There is always the question around howmuch you spend on staff internally for the tax that yourecover. There is a trade-off in terms of how muchspend and what that brings in. As part of this changeprogramme, which is to save money, what is the totalquantum in terms of professional external support?John Keelty: I’m sorry; I don’t have that figure.

Q351 Chair: I think you’ve got to provide us withthat figure. It’s really important and it is an issue thatMr Barclay has raised, so you might have thoughtabout it before you came, because we have raised itevery time.John Keelty: Of course.

Q352 Stephen Barclay: Again, this is not a newissue to the PAC, but another area is about staffmoving mid-project and whether that links intodeliverables. Can you assure us that for the 54projects, all staff will have interim milestones and notbe able to move prior to their milestones? I am notsuggesting that staff should be in place until 2015.That is clearly not a sustainable position, because youneed to keep people fresh and motivated. Can you atleast assure the Committee that no staff moves forthose running the projects will happen that are notlinked to a deliverable milestone?Dave Hartnett: Let me pick that up, Mr Barclay. Wedon’t aim for our programme and project managers tomove, but some will. It is in the nature of a hugeorganisation such as ours that some of our very bestpeople are managing those programmes and projects,and part of the task we have given them is to developthose behind them.

Q353 Chair: I think our interest as a Committee is,do you aim to keep them there? The most frustratingthing we see as a Committee is that lack ofresponsibility and accountability. You come back threeyears later and somebody else is there. It is not thatyou aim for them to leave, but do you aim to keepthem there?Dave Hartnett: We certainly do.

Q354 Chair: Do you aim to keep them there?Dave Hartnett: We plan to keep them there, but allsorts of things can happen in those four years. It isperhaps worth adding that the major projects authorityin the Cabinet Office has recently sponsored a startinggate review of our change programme, which has hadmany good things to say about the governance andhow tightly we are managing it. I wanted to say, MrBarclay, that you asked us how many were off track.I cannot remember the technical term for them, so canI call them “hit squads”? They go in when things gooff track. To my knowledge—others may need tocorrect me—we have only done that twice and onsome projects we are ahead of plan at the moment.

Q355 Stephen Barclay: I wasn’t suggesting that youcould stop people leaving.Dave Hartnett: I understand that.

Q356 Stephen Barclay: I am saying that for examplethe FiReControl project had five programme directorsover six years, and a number of those moves werewithin the civil service. Interim milestones should beset, which are linked to people’s appraisals andtherefore to people moving. A thing that werepeatedly see on the Committee is that that is notbeing done. I do not get an assurance from youranswer that that has been done in this case, but




perhaps that could be taken away. Who is the seniorresponsible owner for the 54 projects?Dave Hartnett: Lesley Strathie.

Q357 Stephen Barclay: And she’s not in post at themoment. She’s off, is she not?Dave Hartnett: She is off at the minute and MikeClasper has filled that role while she has been away.

Q358 Stephen Barclay: Right, and she will resumethat as SRO.Dave Hartnett: Yes, that’s the plan.

Q359 Stephen Barclay: And how will she, given herother duties, get oversight of 54 projects?Dave Hartnett: We have a core project team, whichis stronger probably than we have ever put into anyprogramme before, and the starting gate reviewconfirmed that. Our CIO is the change director. Heand his team are leading the oversight.

Q360 Stephen Barclay: So if she is personallyresponsible, which an SRO is, how many of the 54projects would need to go wrong for her to be heldseriously responsible from a career perspective?Dave Hartnett: I don’t think I know the answer tothat, Mr Barclay, largely because we do not plan forany of them to go seriously wrong. One of the keymessages from the recent review is that thegovernance is in really good shape and would identifythings like that, and we would act quickly.

Q361 Stephen Barclay: Should you not plan? It isthe nature of projects that if you are running 54projects, some will go wrong. We have two PAChearings a week because so many projects, sadly, gowrong. It seems to be a leap of blind faith to assumethat all 54 projects will go well.Dave Hartnett: Not at all. One thing we have learnedtime and again from the NAO is that it is all too easyto be over-optimistic and that is exactly what we aretrying not to do.

Q362 Chair: Can I come in on that? Following onfrom that, you have no contingency at all. You wereset a financial cuts target. You are working entirely onthe assumption that you will achieve them all withabsolutely no contingency. Is that wise?Dave Hartnett: Chair, we have no cash contingency.Given the state of public funding—

Q363 Chair: You’ve got to achieve your cuts. Youhave no contingency plans. Of course, you mustachieve the financial cuts; that is an imperative fromthe Treasury. You have no contingency plans foralternative ways in which to achieve those financialcuts other than the 54 projects and the other bit.Dave Hartnett: No, since the NAO review, and duringit, we have developed other plans as to what we mightdo if we needed a contingency.

Q364 Chair: They are not in the NAO Report, arethey?Dave Hartnett: No, because our thinking on this isvery recent. It was prompted by the NAO work.

Q365 Chair: So, you are creating contingency plans?Dave Hartnett: May I quickly tell you what we aredoing? For example, we could speed up the reductionof the number of buildings that we occupy. We canspeed up our process change in our tax systems andin our PaceSetter work as well. Those are the sorts ofareas in which we would find contingency. It isimportant to say that we have a proud record ofdelivering the savings that we set out.

Q366 Chair: No, you don’t. We looked at that. Thevery first Report that we looked at across Governmentwas the performance of all Departments in relation tothe 5% year-on-year cuts in the last spending review.I’m looking for the figure. Perhaps the NAO can helpme. On page 16, paragraph 1.15, it says that 12.6% ofsavings were not evidenced, not new and not reportednet of ongoing costs. So, you don’t have a proudrecord.John Keelty: That review took place at the halfwaypoint when we had planned only to realise somethinglike 40% of the savings.

Q367 Chair: What that review showed was thesavings that you had reported. It was not showing thesavings that you hadn’t reported. These were savingsyou had reported and 12.6% of them were notevidenced, not new and not reported net of ongoingcosts.John Keelty: By the criteria, that is absolutely right,but this was halfway through that SRO7 efficiencyprogramme. We learned from that.

Q368 Chair: Well, I rather resent you saying, “Wehave a proud record.” The last time we looked at thiswe found that our 12.5% were again not evidenced.John Keelty: Some 87% of them were sustainableefficiency savings.Chair: You should not be putting up savings andpretending that there are savings when they are notevidenced. That is not how any public servant in anyDepartment should be operating.

Q369 Mr Bacon: Mr Hartnett, you have said that,prompted by the NAO, you are now doing somethingabout the contingency. Why did it require theprompting of the NAO to do something about thecontingency?Dave Hartnett: We were actually thinking aboutwhere we would have back-up for our cost-savingsproject if any started to go wrong. The engagementwith the NAO on the cost-saving Report wassignificant. It made a number of recommendations.

Q370 Mr Bacon: And one of them was aboutcontingency?Dave Hartnett: One of them was an observationabout contingency.

Q371 Mr Bacon: What interests me is that the failureto have contingency is a hardy perennial. Among themany mistakes that the Rural Payments Agency madewas the failure to have a contingency plan. Actually,in that particular case, it had one and then it scrappedit. Such behaviour is commonplace, and we have seen




it many times. Folk come to this Committee withprojects that have gone wrong and where there wasno contingency plan. I would hope that by nowtattooed on the eyelids of permanent secretaries arethe words, among many others, “Make sure you havea contingency plan.” Therefore, why did it require theprompting of the NAO for people to think, “Hey, weneed a contingency plan.” Why was it not already sodeeply embedded in the DNA that the NAO noticedand commented on the fact that there was a robustcontingency plan? Why was it not that way round?Dave Hartnett: Because we wanted to get our changeprogramme going. We knew we had to do this, andthe NAO helped us—

Q372 Mr Bacon: You make it sound like becauseyou were in a hurry. The Rural Payments Agency wasin a hurry; it was in such a hurry that it chose theshortest of all the available timetables, as well aschoosing the most complicated of all the possiblepayment systems. But the evidence is over manyprojects that being in a hurry is not enough. In fact,being in a hurry can cause delay.Dave Hartnett: I agree with that.

Q373 Mr Bacon: But back to my question. Why didit require the NAO to prompt you to have acontingency?Dave Hartnett: The crucial thing for us, Mr Bacon,was to make sure we understood the risks. That canbe done certainly without cash contingency. Therewas some thought that maybe we should have hadsome cash contingency, and we could not do it, whichis now why we have looked in the other areas that Ihave mentioned.

Q374 Chair: And 36% of your current proposals’new cost reductions are in the final year, so if you failon those, you’ve had it.Dave Hartnett: If we fail.

Q375 Matthew Hancock: One thing that came outof that is that you mentioned that part of yourcontingency is to do more on buildings and makegreater savings there. I wonder why you are not doingthat anyway.Dave Hartnett: Well, we are.

Q376 Matthew Hancock: Hold on. You cannot bedoing the same amount as is in your contingency. Youmust be doing more.Dave Hartnett: No. We are doing a lot on buildings.What we can do, Mr Hancock, is to speed it up. Letme tell you the record for last year. I think weachieved 43% of building savings across Government,despite only having 14% of the estate.

Q377 Matthew Hancock: But if you can speed it up,and these are savings that you could deliver, whydon’t you deliver them?Dave Hartnett: Well, we are trying to do that.

Q378 Chair: I have to say that as an Arts Minister Ispent for ever trying to get you out of SomersetHouse. We finally succeeded and put it to better use,

but you were very, very, very late in getting out ofthere.Mr Bacon: Your fingernail marks are all over theoutside of the building.Dave Hartnett: We are about to mothball it to saveour costs.

Q379 Chair: Can I raise two other issues that are ofconcern to me? One is that you are assuming a cut insickness absence, from your assumption of 9.9 daysin 2010–11 to 7.9 in 2011–12. Did you achieve your2010–11 target?Stephen Banyard: We very nearly achieved thesickness absence target last year, or we hit it, and thisyear we are in front of profile for getting down, so webelieve that we will get there.

Q380 Chair: So what was “very nearly”?Stephen Banyard: I can only speak for my own area.The target there was 10.76 and we achieved 11.01, butwe are currently tracking at 8.3.

Q381 Chair: The figure I have got here for sicknessabsence in 2010–11 is 9.9.Stephen Banyard: I was speaking for my own area.

Q382 Chair: And by 2011–12 you want to get to 7.9.That is out of the report, isn’t it, Jane?Jane Wheeler: The target for HMRC was an averageof 9 days per person in 2010–11, which theDepartment did not achieve. I am not sure how far itwas below it.

Q383 Chair: And you were at 9.9. So it is not verynearly—10% is not nearly, on these figures.Stephen Banyard: I gave you the answer for my ownarea, which is about third of the Department. We madea substantial reduction last year. We did not hit thetarget, but I am confident that we will beat the targetthis year.

Q384 Chair: Okay. I understand that you looked atyour bit. Mr Keelty, you have some responsibility.You are here answering for this whole changeprogramme, where you do not know where you areon the 54 projects. I picked up that you have assumeda cut in sickness absence. I also picked up that youfailed to achieve that in 2010–11. I want to know whatyou have done in 2011–12, and I want to know howviable your assessment of the cash savings is.John Keelty: At this point in 2011 for the Departmentas a whole we are tracking at 8.7 days, and our targetis 7.9. As Stephen said, we are on target, we believe,to get the 7.9 by the end of this year.

Q385 Chair: And that will give you your cashsavings. So we can hold you, Mr Keelty, to account,if you don’t achieve that. Is that right? Or do we holdMr Hartnett to account?Dave Hartnett: I think you hold the accounting officerto account, so that would be Lesley or me.

Q386 Mr Bacon: Mr Keelty, when you say thatyou’re on target—Stephen Barclay: You’re not on target.




Mr Bacon: Mr Barclay says you are not on target.Even if Mr Barclay were wrong—and he rarely is—how do you know that you are on target? How do youknow who is going to be ill on 12 December or nextJanuary? How do you know there is not going to bean outbreak of measles or flu or avian flu?Stephen Banyard: We don’t. What we do is to lookat seasonal patterns. We are trying to reduce sicknessabsence, so we are looking at where we have now gotto. The figures you have been given are the 12 monthsup to a certain point—today. Those figures are fallingfast because the figures in current months are verymuch lower than they were a year ago.

Q387 Chair: If you know that, why don’t you knowwhat the 2011–12 figure is?John Keelty: The 2011–12 figure, as of today, is 8.7.That’s the year we are in at the moment.

Q388 Chair: Sorry, why don’t you know the2010–11 figure?John Keelty: I believe that is 10.8.Chair: 2010–11 was 10.8.

Q389 Mrs McGuire: 2011–12 is 8.7. Is that year-on-year or is that from 1 April?Ian Swales: They are rolling.John Keelty: These are rolling trends. I have just beenpassed a note: 2010–11 was 9.65 days, and 2009–10was 10.49.

Q390 Chair: Do you agree with that?Jane Wheeler: We have 9.9 days for 2010–11 in thereport—paragraph 2.18, final bullet. That is againstthe average of 7 point—

Q391 Chair: Seven point what? AcrossGovernment? Don’t talk about the private sector.Jane Wheeler: The cross-Government figure was 8.5for year ending September 2010.

Q392 Stephen Barclay: The reality is that you set atarget for 2010–11 and you missed that target. Havingset a target, you missed it. You are now about toembark on a major change programme. Do you thinka major change programme in isolation will improveor worsen potential sickness rates?John Keelty: During the beginning part of this yearwe did a lot around improving the mechanisms andprocesses for recording sick leave and generallyimproving it. If we see the tracking for this year, sincewe introduced that initiative in the Department, thesickness leave has dropped substantially.

Q393 Stephen Barclay: Again, with respect, you arenot answering the question I put. My question wasnot, “Is the trend moving in the right direction?” Iwould hope, given the focus the Department is placingon sickness, that the trend would be moving. It ispleasing to hear, and the Department deserves praisefor achieving that. That is good news.The point that I think the Chair was driving at is thatyou set a very aggressive savings target related tosickness, without any contingency, if that is notachieved. Therefore, that saving will have to come

from somewhere else if it is not achieved. While pastperformance is not a guarantor of future performance,given that this target related to a higher target than theeventual one, it should have been easier to achievethan the eventual one.The point is that, going on your performance to date,you set a target and missed it. Looking ahead, there isgoing to be a shortfall in the savings. There is nocontingency allocated. The question for theCommittee must be, “Where else are you going to getthat money?”John Keelty: The failure of the 2010–11 target wasnot in the spending review period. That is the firstthing.

Q394 Stephen Barclay: No, but your starting pointis higher.John Keelty: We are on track this year for the revisedtarget that we set, irrespective of the achievement thatwe got in 2010–11.

Q395 Stephen Barclay: Sure, but you start from ahigher point. So the delivery, the savings, theimprovement you need to achieve, are increased,because you are starting from a worse point.John Keelty: Absolutely, and we are on target to hitthose savings.

Q396 Mr Bacon: Are we basically saying that thehead count you are planning for is predicated on thisparticular level of sickness absence, and that is howthe saving is achieved? Is that right?John Keelty: Sorry, I am not sure I understand thequestion.

Q397 Mr Bacon: If I know that in my organisation Iam going to have a 1% sickness absence, I know thatI need fewer people to achieve the same amount ofwork—because only 1% of them will be absent duringa calendar year—than would be the case if I knew that7.9% were going to be absent. Are you basicallysaying that in doing your sums, you work out howmany people you need and, predicated on a reductionin the sickness absence, you come to the conclusionthat you need slightly fewer people, because yoursickness absence is down?John Keelty: Yes.

Q398 Mr Bacon: Right. Presumably, if you do notachieve your target, it is not in the end a question ofmoney, because the people will have gone. Theanswer is an increase in backlog, isn’t it? It is areduction in service.John Keelty: It will have an impact on productivity,if that is to be the case.

Q399 Chair: Let me ask a question arising out ofthat. You intend to cut your staff by 19,000.John Keelty: No, we intend to cut them over thespending review period by 10,000.

Q400 Chair: No—19,000, and then recruit 9,000.You have almost given away the first bit of thequestion. The 9,000 you are recruiting are all going tobe redeployments out of the 19,000, are they?




John Keelty: Virtually all, yes.

Q401 Chair: How interesting. You are not taking theopportunity perhaps to change the quality or calibreof your staff; you are just going to move staff aroundthe place in-house. We will take that as read. You arecutting the staff on personal taxation by 50%.John Keelty: Not 50%.Dave Hartnett: It is 34%.

Q402 Chair: Sorry—you are cutting by 34%. Whathave you done about modelling that in terms of a risein non-compliance?Dave Hartnett: We have done quite complicatedmodelling. Our top priority in relation to the reductionin staff in personal tax has been to minimise it in thefirst two years, so that we can complete thestabilisation of pay-as-you-earn, and to back-load. Iwill ask Stephen to come in, but our basic strategy isto continue to improve the performance of pay-as-you-earn to take savings from more effectiveprocessing through NPS. For example, last year, wewere addressing eight tax years in one year, whereasnormally for pay-as-you-earn we want to beaddressing three: the end-of-year reconciliation forone year, the coding for the next year and in-yearchanges for another one. That will be a hugeefficiency for us.

Q403 Chair: I understand that you think theworkload will go down, because you will have dealtwith the backlog. In effect, that is what you are tellingus. But have you done an assessment for such amassive reduction in staff in the one section, and whatit will mean for non-compliance? Have youmodelled that?Stephen Banyard: We do not believe it will have aneffect—

Q404 Chair: At all?Stephen Banyard: We do not believe so. Our firstpriority is to stabilise pay-as-you-earn. In the first twoyears, we are not planning to take many savings outof this area at all. In fact, we have put additional staffin to try to get the place up to date. The savings areback-loaded to years 3 and 4. They fall into a numberof areas.

Q405 Chair: Mr Banyard, have you actuallymodelled it? I ask because one of the criticisms is thatthe NAO thinks you have a decent understanding ofyour costs, but in going forward you do notunderstand the relationship between expenditure andoutcomes. I don’t quite know how you put it, but thereis a way in which they put it in the report—Jane Wheeler: The relationship between cost andvalue.

Q406 Chair: Thank you. I have taken this as anexample of where you are going for a huge change—a 34% cut—because you think you will have dealtwith the backlog and the system will have settleddown. I really want to know whether you havemodelled it. Or is this Committee going to come backto this in 2014, when we will still be the same

Committee, and find that your non-compliance hasgone up?Dave Hartnett: We have done the modelling.1 Weare also wary that there is a risk that voluntarycompliance might drop.

Q407 Chair: By what?Dave Hartnett: A few percentage points.

Q408 Chair: What? Can we see that? Can the NAOsee the paper setting that out? What percentage?

Q409 Mr Bacon: A very small percentage couldamount to a very great deal of money, couldn’t it?Dave Hartnett: Indeed. Our objective is to maintain—

Q410 Chair: I can understand your objective. I canunderstand that. We all share that and we welcome it.But you are cutting your staff by 36%. You are goingto have dealt with the backlog. We need to know whatyou think that means non-compliance will go up by.What percentage? What total? You have done thework. You ought to be able to share the papers withthe NAO, which can then reflect that in its report.Stephen Banyard: We have a new operating modelfor pay-as-you-earn operating under NPS. The systemis new, and for the first time we have a whole-customer view. Our new operating model is thereforebuilt around a completely new rendering of pay-as-you-earn. We are learning about that as we go along.

Q411 Chair: So you have not yet done the modellingto show the impact. That is slightly finger in the air,saying, “We think we’ll have dealt with the backlog,that the system will have settled down and that thedata will be a bit better, so there will be fewer errors.”Stephen Banyard: No, not at all.Chair: You have not modelled it. Mr Hartnett justsaid that you are expecting voluntary non-complianceto go up by a few percentage points.

Q412 Mrs McGuire: Could you explain what a fullcustomer means rather than a half customer or aquarter customer?Stephen Banyard: I can. Pay-as-you-earn wascomputerised in the mid-1980s, and it wascomputerised on the basis of employments. If you hadan employment with someone, that employmentinformation would be held on one of 12 regionaldatabases. If you had two employments, the secondemployment could well be held on another database,and the only connection between them was pieces ofpaper.

Q413 Mrs McGuire: So you are looking at me nowas an individual as opposed to an employee?Stephen Banyard: Indeed. If you phoned our callcentre—

Q414 Mrs McGuire: Assuming I could get through.1 Real Time Information will improve voluntary PAYE

compliance because reporting to HMRC will be integratedinto the payroll process and employers will know that HMRChas earlier visibility of payments due




Stephen Banyard: Our staff would bring up yourrecord for you and look at all your employments, asthey do, and make the whole pay-as-you-earn taxright. That is a new facility for us.

Q415 Mrs McGuire: And that is working?Stephen Banyard: Yes, it is working well.

Q416 Mr Bacon: May I ask if you have the facilityto take on temporary staff when, for example, youhave a sickness absence gap that was larger than youexpected and therefore you have a backlog growing?Can you take on temporary staff to help sort out theproblem?Stephen Banyard: We can and we do, and we trainthem to a required level to do the work.

Q417 Mr Bacon: And where do you get them from?If they are temporary, they come and go—where doyou get them from?Stephen Banyard: We do not get them in the sense oftemporary come-and-go; we would recruit people fora term appointment.

Q418 Mr Bacon: I see—on a fixed-term contract.Stephen Banyard: On a fixed-term contract. Wewould bring them in for 11 months or 23 months, andwe would give them full training. We have not haddifficulty recruiting good people.

Q419 Mr Bacon: Why 11 or 23? So they cannot sueyou for unfair dismissal?Stephen Banyard: We have recruited for 23 monthsbecause that is the period we think we will needpeople for.

Q420 Stephen Barclay: How many people have youhired externally in the past 12 months?Stephen Banyard: People or full-time equivalents?

Q421 Stephen Barclay: How many people have youhired externally?Stephen Banyard: All of our staff have been recruitedexternally at some point.

Q422 Stephen Barclay: No, I said in the past 12months. You are reducing head count to make staffsavings. Over the past 12 months, how many peoplehave you hired externally?Stephen Banyard: In terms of people, rather than full-time equivalents, approximately 2,500.

Q423 Stephen Barclay: Right. I am conscious of theCabinet Office freeze on external recruitment, but allthose 2,000 people are defined as essential front-linestaff?Stephen Banyard: They are essential front-line staff,and they are helping us to get pay-as-you-earn up todate. We are determined to deliver a good system anda good service to the public, and that is how we aredoing it.Chair: As Stephen has just said, if you look at page26, paragraph 2.20—

Q424 Stephen Barclay: Just coming back to thatagain, it is highlighted in the report, which states, atparagraph 2.20, “Wider experience indicates thatorganisations tend to over-estimate how much theircost reduction plans will actually save and bestpractice is to identify a contingency of 50 per cent.”What level of contingency are you planning toidentify?Dave Hartnett: At the moment, certainly not 50%.Chair: What?

Q425 Stephen Barclay: So you are not followingbest practice.Dave Hartnett: We are not following what is here,because at the moment we cannot. I think, Mr Barclay,the key is we are monitoring risk incredibly carefully.

Q426 Chair: What is your contingency level? Yousaid that you are now planning contingency, so whatlevel are you up to?Dave Hartnett: I do not have a level.

Q427 Chair: Do you have a number, Mr Keelty?John Keelty: We are not planning for a specificnumber. As Dave says, we are monitoring the risk andwe will adjust things as we get to them.Chair: This is very waffly.

Q428 Mr Bacon: May I labour the point about theRural Payments Agency? It introduced an enormouschange programme at the same time as sacking alltheir most experienced staff and replacing them withtemporary workers. You say that you are monitoringthe risks, and it is good to hear that you are. What doyou do about it when you identify that a risk that youhave been monitoring has materialised? Whathappens next?John Keelty: That is a very difficult question, becauseit could be any sort of risk. But as soon as that riskbecomes an issue and we need to take action, we willcertainly consider what is the appropriate action totake. It might be right to move another programmeforward or, if the risk is a shortage of staff—we have66,000 staff in the Department—we might have tomove some staff from over there to here to help withthat programme.

Q429 Stephen Barclay: Where you have identifiedsavings, are you not moving as quickly as you can onthose? From your answer to Mr Hancock’s questionabout property and to Mr Bacon, your contingencyseems to be, “Ah well, we can speed up otherprogrammes to deliver other savings.”Mr Bacon: Move things forward.Stephen Barclay: Surely you would be deliveringthose as quickly as possible anyway.John Keelty: We have a history of handling largeprogrammes—we are a large Department handlinglarge change. Throughout the past few years, asnecessary, when things ebb and flow, we adjust ourprogrammes accordingly. I am having difficultyanswering your question, because it is a largelyhypothetical situation.Chair: Okay. Maybe the Comptroller and AuditorGeneral can put it in another way.




Amyas Morse: I will try to. Everything you’ve justsaid is fair—you have a large Department and youhave a record of handling large programmes. It is alsofair to say that you have been able to take a reasonableamount of time over doing that. That is not a criticism;it’s just a factual statement and, I think, a faircomment. You now move into an era in which you aretrying to change a lot faster than you were. I thinkthat is fair to say.Dave Hartnett: It is.Amyas Morse: And you have been able to carry outwhat I call fairly discrete change programmes, butnow the connection between one another is becomingmuch closer. So what we are trying to say—I urge youto consider this and I shall be interested to hear yourreaction—is that you must be able to react early, tounderstand the linkages early and to get whateveractions you are going to take into place in time toretrieve the situation before the performance gap istoo great. It is not that we do not think you are tryingto tackle those things, but you could do withdeveloping a more sophisticated and integratedapproach as early as possible.John Keelty: We do recognise the need to look atthe risk and take an integrated approach. You haverecognised in your Report that we are setting up thegovernance arrangements to do that. The question is:can we set aside a chunk of money for the eventualitythat something might happen? As a GovernmentDepartment in times of austerity, finding a chunk ofmoney that you can just set aside is extremelydifficult. The Government want to use that money inother ways.Amyas Morse: I have every sympathy with what youhave said. A chunk of money not doing anythingshould be as small as possible. But that is a result ofhow fast you can react—how quickly you can spot ifyou are off plan. We are talking about what you woulddo. How big a gap is there from flash to bang? Ifsomething is off track, are you geared up to reactreally quickly and put those extra measures into place,or will quite a long time gap be allowed?Dave Hartnett: We are geared up to identify anysuggestion that a project is starting to go that way.With regular, weekly reporting, we have put changedirectors into each of our major business areas, andthat monitoring process is working very effectively.

Q430 Mrs McGuire: But it is not about identifyingthe risk or the problems; it is about how quickly youcan react. Is HMRC now flexible enough to give a farquicker response when a risk is identifiable? Have youlearned any lessons, dare I say it, from the child taxcredit fiasco, where the risks were obvious toeveryone and HMRC was so far behind the curve thatpeople are still recovering from the damage done?I wonder what business people listening to thisexchange would think of it, because HMRC demandsprecise information, yet there is a lot of woolliness inour discussion this afternoon. We have heard,“Contingencies are not there. We are not sure what wewill do if this happens. We are monitoring things.”Frankly, you guys are in the front line not just of tax,but of tax and benefit, child benefit—the lot. People’sfinancial viability will depend on your being flexible

enough. Frankly, I do not think that you have givenus much confidence today that you do have thatflexibility. Maybe I am alone in that.Amyas Morse: May I just make one comment? I waslistening to a presentation recently by your changedirector, Phil Pavitt—is that right?Dave Hartnett: Yes. Chief information officer andchange director.Amyas Morse: I have to say that if the performancematches everything that he was saying—I am sure thatit does—then it sounded pretty impressive to me.Chair: He is not giving evidence to us AmyasMrs McGuire: There is always a gap betweenrhetoric and delivery. We have three senior peoplehere from HMRC and I am just not getting enoughfrom them, which makes me feel that, within the nexttwo or three years, they will be implementing majorchanges in terms of the flexibility of response.

Q431 Chair: I think Anne has summed up the viewof the Committee very precisely.I want to ask a final thing on tax credits. Myunderstanding is that the current debt is £4.7 billion. Ihave two questions. How much of that is due tocustomer error, and how much is down to HMRCerror?Dave Hartnett: Most of it is due to customer erroror worse.

Q432 Chair: What proportion?Dave Hartnett: I will have to write to you, because Icannot remember the number.

Q433 Chair: In a week, please.Dave Hartnett: Of course.

Q434 Chair: Can you give us a ballpark figure?Dave Hartnett: I will give you a figure, but I may bewrong: 80%.

Q435 Chair: So that is customer error. How much isrealisable out of that £4.7 billion?Dave Hartnett: We think probably something of theorder of three to three and a half currently, but we areworking on that. We have taken a new approach todebt generally, and we are aiming to reduce the debtto £3.7 billion by the end of the spending review.

Q436 Chair: It is going up at the moment. You willreduce the debt by getting the calculation right in thefirst place with this cohort of people, not by pursuingthe debt. My understanding of paragraph 38 on page11 is that you have only collected £380 million againstyour target of £550 million. So you are 50% down onyour target. Then there is this funny little sentence inthe Report—I did not mean peculiar—that there is£1.7 billion of outstanding debt that you are remitting.Dave Hartnett: We are certainly planning to remit asubstantial number.

Q437 Chair: £1.7 billion?Dave Hartnett: I am trying to find it in the Report.Currently, we are remitting £1.055 billion relating totax credit customers and that is in relation to debtsincurred between 2003–04 and 2008–09, where we




have received no payment in the past 12 months, andsome of those people we cannot find.

Q438 Chair: So we have lost over a billion, and wemight lose another £700 million or whatever it is.Dave Hartnett: I don’t know yet.

Q439 Chair: When are you going to take thatdecision?Dave Hartnett: Whether to remit the £1.055 billion?

Q440 Chair: No. There is a figure in the Report. Ithink you have been pointed to it. What page is it?Where did I pick this up from?Amyas Morse: Page 47.Chair: Page 47. It’s in the other Report. “TheDepartment estimates that £1.7 billion of new taxcredits debt is likely to be generated”—blah, blah,blah. Is that where I got the figure?Dave Hartnett: Yes, but that is not about remission.John Thorpe: That is not about remission. Based onthe Department’s own calculations, “without anyfurther intervention” or action to reduce debt, “debtscould increase to £7.4 billion by 2014–15.”Dave Hartnett: I am terribly sorry. I have forgottenthe question.

Q441 Chair: It’s a heck of a lot of money is whatwe are saying. My own view, which I am sure isshared by the Committee, is that the only way youreally get this right is by getting the calculation rightin the first place, not by trying to pursue really poorpeople.Dave Hartnett: I agree, and our strategy is to help ourcustomers and ensure that our calculations are right inthe first place.

Q442 Chair: But you are remitting over a billion?Dave Hartnett: That is the plan.

Q443 Ian Swales: I want to ask a couple more thingsabout tax credits. Just to put this into context, what isthe entire operating cost of HMRC, just to thenearest billion?John Keelty: £3.5 billion.

Q444 Ian Swales: So about £3 billion of staff costs.Would that be about right?John Keelty: A little less than that.

Q445 Ian Swales: I think it is really important tohave that number in context when we are talkingabout the size of these numbers.John Keelty: £2.2 billion.Ian Swales: £2.2 billion is the staff cost. Your entirestaff costs are £2.2 billion—

Q446 Chair: And the rest takes you up to? That ishuge. What was your original figure to Ian?John Keelty: £3.5 billion, so on IT andaccommodation—Ian Swales: £3.5 billion, so that is all the other costsof offices and so on.Chair: A third and two thirds, really.

Q447 Ian Swales: Okay. I just want to pull out a fewfigures from this. It says in paragraph 33, page 10,that you have a target to reduce tax credits error andfraud to no more than 5%. My calculation is that thatis about £1.4 billion—that is your target to get downto, for errors and frauds. Is that a fair assumption? Iam taking 5% of the £28 billion spent on tax creditsin the previous paragraph.Dave Hartnett: We actually have a higher target eachyear, Mr Swales, because the number of new claimscoming into the tax credit system is about 20% a year.So our target is to bring this down by £1.4 billion by2014–15, but we will do that by tackling error andfraud at roughly £2 billion a year. We have changedthe whole strategy to do that. Whereas you heardStephen Banyard talk earlier on about “process now,check later”, the big change in tax credits is to checknow, process afterwards.

Q448 Ian Swales: It says: “The Department has atarget to reduce Tax Credits error and fraud to no morethan 5%”, so what are we talking about? Some £1.5billion or so as your target—is that right, or have I gotthe wrong number? What would your target be?Dave Hartnett: £1.4 billion.

Q449 Ian Swales: So it is £1.4 billion—that was thefirst figure I said. Okay. So that is one figure that isimportant. Let us then move to the one that the Chairjust mentioned, which is that you are going toassess—in paragraph 38, on the facing page—“thevalue for money of collecting £1.7 billion of taxcredits debt not under active recovery”. Can you justtalk us through how you are going to assess the valuefor money of collecting that debt?Dave Hartnett: Broadly, we assess the value formoney by looking at what we think we are going torecover as against the cost of the actual recovery. Thatis a balance that we are making all the time in thearea of tax credit.

Q450 Ian Swales: So when you say “the cost ofmaking the recovery”, what kind of things are wetalking about? People and resources, presumably.Dave Hartnett: People and resources. We haveoutsourced some debt collection to debt collectionagencies.

Q451 Mr Bacon: Can you just remind us how much?On the record.Dave Hartnett: I cannot—

Q452 Mr Bacon: It was £214 million, wasn’t it?That you have outsourced.Dave Hartnett: I think it was more across our wholebusiness.Stephen Barclay: Well, it was £214 million between27 July 2010 and 14 January 2011—

Q453 Mr Bacon: So that is in the last full year. And,of that, 26% or £57 million was recovered. Well, ifyou are adding an extra level of new tax debt of £1.5billion in a year, and you are getting £57 millionthrough recovery, it doesn’t take Einstein to work outhow those two graphs are going to diverge, does it?




Ian Swales: In fact, the Report says that “without anyfurther intervention tax credits debts could increase to£7.4 billion by 2014–15.” That is in paragraph 37. Sowhat intervention are you going to make?Dave Hartnett: We have changed our approach tomanaging tax credits. The four key things are: first,checking first, paying second; secondly, reviewing therisky areas of tax credit, such as the cost of child care,which is one of our highest risk areas; third, by havinga process of cleansing, which is automatic checkingof claims when they are made, for which we have anew risk tool; and, finally, ensuring that we improvethe training of our people and how they work withclaimants, so that there is less over-claiming.

Q454 Ian Swales: Okay. Much nearer the end of theReport, on page 46, in the detailed tax credit area, itdiscusses your having launched a joint fraud and errorstrategy with the Department for Work and Pensions,targeting £8 billion of tax credit losses over the nextfour years. How much resource, in people and money,has HMRC put into that?Dave Hartnett: I do not know the answer to that.

Q455 Ian Swales: Well, approximately. Is it 10people? Is it 100? Is it 1,000?Dave Hartnett: No, it will be hundreds.

Q456 Chair: Does Mr Keelty know?John Keelty: No, I don’t know the exact number.Chair: Does anyone behind you know?

Q457 Ian Swales: We are talking about somethingthat is about £8 billion of your tax credit losses. Iwould have thought that you would know somethingabout this project that you have set up. Do you haveany metrics at all on it?Dave Hartnett: Not today, I am afraid. I am verysorry.Chair: Very finally—Dave Hartnett: The information has come frombehind. We have 1,700 people or full-time equivalentsin tax credits working on compliance activities.Chair: That is on tax credit.

Q458 Ian Swales: Is that on this joint project withthe Department for Work and Pensions?Dave Hartnett: No, we do not have that numberwith us.

Q459 Ian Swales: Could you write to us?Dave Hartnett: Of course.

Q460 Ian Swales: I made the context-setting remarkat the start that the entire manpower of HMRC costonly £2.2 billion. My final question is: if you had yourtime again, would you have cut your staff in HMRCas fast as you did? Do you need to revisit your futurestaffing strategy in the light of all the issues that wehave discussed today?Dave Hartnett: There is a real balance there. If youhave look at what we have achieved, despite cutting,we cut our compliance resource by 20%. In five years,while that was going on, we doubled the complianceyield from £6.9 billion or £7 billion to £13.9 billion.

Stephen talked about how we had improved the post.Our contact centres are nothing like good enough yet,but there has been a huge improvement there too. Wehave taken our debt balance down by £3 billion to £4billion. We are doing good things.

Q461 Ian Swales: Other than the well publicised£900 million, you do not think that there are any more“invest to save” projects for HMRC, given the tax gapthat we have talked about before.Dave Hartnett: No, Mr Swales. We are constantlylooking for projects. Whether we can get the fundingfor them is another matter. Some of our offshorework—in the last week we have made it public howwe are approaching the 6,000 account holders in aparticular Swiss bank—we will be looking to fund.

Q462 Ian Swales: Thinking about some of thethings that we have spoken about this afternoon, haveyou raised any “invest to save” projects with theTreasury that have been turned down?Dave Hartnett: Not that I can recall. The reason forthat is that we want to demonstrate clearly what wecan do with the £917 million first. We are ahead ofprofile in what we promised to deliver.

Q463 Ian Swales: But the £900 million, as Iunderstand it, is specifically to do with tax avoidance.We have many other issues, such as recovery of debts.Dave Hartnett: No, there are lots. It’s debt recovery,avoidance, and principally evasion.

Q464 Stephen Barclay: Quickly to pick up on aquestion, it is very misleading to talk about thecompliance yield in isolation. What Mr Swales wasdriving at was the cost of staff compared to theamount of tax missed that could have been collected.If a company owes £5 billion in tax and you do ahandshake deal with them for £1 billion, thecompliance yield looks exceedingly good—we havebrought in £1 billion. What it does not show is thatwe have lost £4 billion. So talking just about thecompliance yield does not address the point that MrSwales was driving at, does it?Dave Hartnett: I think, Mr Barclay, that you knowthat I am going to say this: we don’t do handshakedeals. I cannot think of a case like the one you havejust described.

Q465 Stephen Barclay: I was just quoting internalnotes. Whether it is done on a handshake or donethrough governance, the point stands. In talking aboutthe compliance yield in terms of the optimum level ofstaff as against the amount of tax you collect, we alsoneed to see how much tax could have been collectedbut wasn’t collected. That’s correct, isn’t it?Dave Hartnett: I think that that’s a very fair point.Chair: Matt has a question on the compliance issue.

Q466 Matthew Hancock: No, it’s on the broaderpoint that Mr Swales raised. Something bugged meduring the discussion on the savings that you aremaking and the contingency, which is linked to thispoint. Could you set out clearly where you are on themilestones to achieving that? The contingency is an




important question, but I don’t think we got you onthe record in that discussion with where you are up toin delivering the goals that you set out.John Keelty: Let me try to answer the question.Please tell me if I am not answering it.Matthew Hancock: Was I not clear? Are you ontrack?John Keelty: We believe that we are on track, yes.

Q467 Matthew Hancock: You believe that you areon track, or you are on track?John Keelty: The mid-term review that we had of thechange programme showed that we were on track.

Like all big programmes, we need to take action tomake sure that we keep going on the right track. ThatReport said that we didn’t need to make any majorchanges to the direction we were heading in. So weare on track. With the large portfolios of change, therewill be things that are doing a little better than others,but we are on track.Chair: That is it. You end on a positive. Thank youvery much for coming, and I am afraid to say that Ithink that there will probably be some more in thenear future.

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Monday 7 November 2011

Members present:


Mr Richard BaconStephen BarclayMeg HillierFiona Mactaggart

________________

Paula Diggle, Treasury Officer of Accounts, PaulKeane, Director, National Audit Office, and AmyasMorse, Comptroller and Auditor General, gave


HM Revenue and Customs 2010–11 Accounts

Examination of Witness

Witness: Anthony Inglese, General Counsel and Solicitor, HMRC.

Q468 Chair: Welcome. I gather this is your firstappearance before a Select Committee, so I hope youdo not find it too onerous. I hope that we won’t takeup too much of your time, but it depends on how thequestioning proceeds. May I refer you first to the noteof the meeting of 8 December 2010 in your offices?Can you tell the Committee whether those minutesare correct?Anthony Inglese: May I say at the beginning, Chair,on that note that I cannot comment on the contents ofthe document? It was prepared as an aide-mémoireby two—

Q469 Chair: Why can’t you comment?Anthony Inglese: For various reasons. I think theCommittee understands the constraint I am under. It’sa note that—

Q470 Chair: No, we don’t quite.Anthony Inglese: It is a note that is legally privilegedand it also—

Q471 Chair: Why is it legally privileged?Anthony Inglese: Because it was part of the evidencegathering that, as a lawyer, I was doing in order—

Q472 Chair: For whom?Anthony Inglese: In order to advise the department.

Q473 Chair: May I just make it clear to you that youare also a civil servant, are you not?Anthony Inglese: Yes, I am.

Q474 Chair: As a civil servant, to whom you areaccountable?Anthony Inglese: I am accountable to my department.

Q475 Chair: No, you’re not. You’re accountable toParliament.Anthony Inglese: But I do believe the Committeeunderstands the constraint I’m under—

Austin MitchellIan SwalesJames Wharton

evidence. Gabrielle Cohen, Assistant AuditorGeneral, NAO, was in attendance.

Q476 Chair: No, we don’t, actually. We think thatyou, as a civil servant, are accountable to Parliament.If there are issues in the public interest, it is beholdenon you to answer them. That is the first thing to say.These issues are all in the public domain, anyway.Rather than evading the questions, which will endwith you being here for rather longer than we hadhoped, it would help if you could actually answerthem.Anthony Inglese: I would very much like to try tohelp the Committee, Madam Chair, but there are someconstraints that I am under. May I tell you how I canhelp the Committee?

Q477 Chair: You have explained that you have givenadvice to another officer of the Crown, who is alsoaccountable to Parliament—namely, the department orMr Hartnett or whoever—so we consider that both ofyou are civil servants, both of you are accountable toParliament, and both of you should give us an accountof yourselves and the content as well as the process. Ido not see how you can quarrel with thatinterpretation.Anthony Inglese: Can I begin by talking about theprocess?

Q478 Chair: No, you can begin by answering thequestions. You have said that you feel you cannotanswer all the questions. You said one of yourconstraints was that you gave advice to thedepartment. You agreed you are a civil servant; youare therefore accountable to Parliament. Any otherconstraints, Mr Inglese?Anthony Inglese: I would like to be able to saysomething, and I can go on to say something morehelpful, but the constraints that I am under, as well aslegal privilege—

Q479 Chair: I do not understand the legal privilegepoint. I have just said to you that the legal privilegepoint is not a point, because you are civil servants,

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7 November 2011 HMRC and Cabinet Office

and you were giving advice to a civil servant who isaccountable to Parliament.Anthony Inglese: There are conventions in Parliamentabout what can be answered on legal privilege—Ministers, for example. There are variousramifications of the legal privilege point. At themoment, there is a judicial review being broughtagainst HMRC.

Q480 Mr Bacon: Oh, really? Can you give us thecase number, please?Anthony Inglese: We have had the pre-action protocolletter by a pressure group and we are now looking atour response.

Q481 Mr Bacon: Are there any proceedings?Anthony Inglese: Proceedings are imminent.

Q482 Mr Bacon: What is the answer to myquestion?Anthony Inglese: The way judicial review works—

Q483 Mr Bacon: What is the answer to my question,Mr Inglese? Are there any proceedings?Anthony Inglese: For the purposes of the sub judicerule, we have had a letter before action—

Q484 Mr Bacon: Yes, I understand that you have hada letter before action. Once again, what is the answerto my question: are there any proceedings before thecourts?Anthony Inglese: Proceedings are imminent.

Q485 Mr Bacon: Are there any proceedings beforethe courts now? Yes or no?Anthony Inglese: At this moment, no.

Q486 Chair: Can I draw your attention to ErskineMay? I want to draw your attention to two thingsbefore we get on to the matter in relation toproceedings. Erskine May explains that when mattersare considered sub judice: “Civil proceedings areactive when arrangements for the hearing, such as thesetting down for a case for trial, have been made, untilthe proceedings are ended by judgment ordiscontinuance.” In your answer to Mr Bacon’squestions, there are no proceedings, so this is not subjudice. Erskine May then goes further: “where aministerial decision is in question,”—indeed, this isnot a ministerial decision; it is an official decision—“or in the opinion of the Chair”—that is me—“a caseconcerns issues of national importance…reference tothe issues or the case may be made in motions,debates or questions.” So under Erskine May, I put itto you, Mr Inglese, that you ought to be answeringour questions fully.Anthony Inglese: Chair, with the greatest of respect,I cannot answer those questions. I am under theconstraints of legal professional privilege, which is aprivilege that I owe to my clients.

Q487 Chair: Are you saying that you as a civilservant override Erskine May? You are a civil servant,Mr Inglese. You are here as a civil servant.

Anthony Inglese: My understanding of the rules isthat they apply where proceedings—the type of casethat a judicial review is involved in—involve aprotocol before action, but that protocol still haseffect.

Q488 Chair: There is no action. We have establishedthat. Mr Inglese, can I read to you again the ErskineMay reference? We have established there are no civilproceedings, but “where a…decision is in question”—that is what we are dealing with this afternoon—“orin the opinion of the Chair a case concerns issues ofnational importance”—I think this does, becausemany, many millions of taxpayers’ money areinvolved—in those cases, “reference to the issues orthe case may be made in motions, debates orquestions.” I put it to you that, as a civil servantanswerable to the Crown, you have to abide by therules of Erskine May.Anthony Inglese: I am accountable in this respect tomy department and to Treasury Ministers.

Q489 Chair: Actually, I do not think you are veryaccountable to Treasury Ministers, but you areaccountable to Parliament, if I may say so. We see alot of officials in front of this Committee. In fact, wedo not even bother with Ministers; we just seeofficials, and they—you—are accountable toParliament.Anthony Inglese: If I may say, I have prepared asmuch as I can for this session. There are some thingswhich I—

Q490 Chair: No, you have to answer the questions,Mr Inglese. This is not a Committee that takesstatements. We want answers to questions—justdirectly, simply. I think it is beholden on you toanswer our questions directly and fully, under ErskineMay and as a civil servant.Anthony Inglese: I do not have a statement, but Ithink it would be helpful if the Committee couldunderstand the—

Q491 Chair: No. I put it to you that you should beaccepting Erskine May. Let me just me ask youanother question. James Eadie, who I understand isthe first Treasury counsel, advised—advice that wasconsidered at HMRC in 2009—that “as PAC are aparliamentary body with an oversight role overHMRC it follows that HMRC’s functions wouldextend to assist PAC with that oversight role. So thereis no absolute bar on disclosure”. Do you agree withthat statement? Do you agree with what Mr JamesEadie said?Anthony Inglese: The legal advice is contained—

Q492 Chair: Do you agree with what Mr JamesEadie said?Anthony Inglese: You have to see the legal advice incontext, and the legal advice is—

Q493 Chair: Do you agree with what he said? ShallI quote it to you again: “as PAC are a parliamentarybody with an oversight role over HMRC it followsthat HMRC’s functions would extend to assist PAC

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with that oversight role. So there is no absolute baron disclosure”? Was Mr Eadie right or not right?Anthony Inglese: The current legal advice that wehave in HMRC—

Q494 Chair: Was he right or not right, Mr Inglese?It is a very simple question.Anthony Inglese: We have taken the unusual step ofwriting—Mr Hartnett has written to you on 19October.

Q495 Chair: Mr Inglese, was Mr Eadie right? Doyou agree with Mr Eadie? He is first Treasury counsel.Do you agree with James Eadie’s view or not?Anthony Inglese: Mr Hartnett has written to you on19 October—

Q496 Chair: Mr Inglese, do you agree with him ornot?Anthony Inglese: And Mr Eadie has agreed withthat letter.

Q497 Chair: Do you agree with Mr Eadie’s advice?Do you agree?Anthony Inglese: All the advice on this subject hasto be seen in its full context.

Q498 Chair: Do you agree? I will quote it again.This is nothing to do with context or anything. Hesaid, “as PAC are a parliamentary body”—that is whatwe are—“with an oversight role over HMRC”—you,as a civil servant, in the HMRC—“it follows thatHMRC’s functions would extend to assist PAC withthat oversight role. So there is no absolute bar ondisclosure”. Do you agree with that? It is a verysimple question.Anthony Inglese: What Mr Eadie has said is thatHMRC—this is in the letter of 19 October—

Q499 Chair: I picked out that bit of advice, becauseit is the key bit of advice that you got from Mr Eadiethat will influence the content of this hearing, and itwould just make our life one heck of a lot simpler ifyou could decide whether or not you agreed with it.Anthony Inglese: The letter—

Q500 Chair: Do you agree with it, Mr Inglese? Whyare you finding it difficult to answer the question?Anthony Inglese: Because what you have done isrefer to a part of an opinion that was written in2009, whereas—

Q501 Chair: It is a pretty basic part. It is a keyelement in the status of you and your department inrelation to us and our Committee. It is a key bit, whichis why I have picked it out. It is the key element. Doyou agree?Anthony Inglese: This is an opinion of 2009. Thereis an up to date piece of advice, which the departmenthas communicated.

Q502 Chair: So was Mr Eadie wrong in 2009?Anthony Inglese: The department hascommunicated—

Q503 Chair: Was he right or wrong?Anthony Inglese: I do not think it helps to go in thatdirection.

Q504 Chair: Why?Anthony Inglese: Because the up to date advice is inthe letter of 19 October—

Q505 Chair: Has he changed his view since 2009?Anthony Inglese: The 19 October—

Q506 Chair: Please, it will make it a very muchsimpler hearing if you will just answer the questions.Maybe the notes will help you to give us a yes or no.These are very, very simple and quick questions. Boththe reference to our proceedings within Parliamentand the reference to the advice from Treasury counselwill then give us a context in which we can get clarityin the questions you ask us. That is all. Just give mea yes or no.Anthony Inglese: Well the answer is that the wordsyou have used are a partial quotation that you cannotdraw a wider conclusion from.

Q507 Chair: No. What it says is that you have a dutyto Parliament. Do you? Do you have a duty toParliament?Anthony Inglese: The letter of 19 October says—

Q508 Chair: These are such simple questions. Doyou have a duty to Parliament? Let me draw it down.Do you consider that you have a duty to Parliament?Yes or no. Is that easier to answer?Anthony Inglese: Yes.

Q509 Chair: You do. Okay. Is there an absolute baron giving evidence to us about individual cases wherethey have national importance? Is there an absolutebar?Anthony Inglese: That is what the letter of 19 Octobersays. HMRC has consistently taken the view that it islawful to pass non-identifying information to SelectCommittees through the gateway that we have.However, it does not follow from this that it isnecessarily properly part of HMRC’s functions toprovide disclosure of taxpayer-specific information toa Select Committee.

Q510 Chair: Are you now saying that, as I take it,James Eadie was wrong? I just want that for therecord.Anthony Inglese: No. I am saying that you have takenthe James Eadie sentence out of context.Chair: I have not taken it out of context. I have takenit as the key way in which he wanted to distinguish—I do want to get on to the content, because we wantto answer questions on the actual content of this case.If you are going to evade them, I think you will endup with an exceedingly cross Select Committee, butlet us see.

Q511 Stephen Barclay: If I am hearing correctly, MrInglese, you have accepted two points—that HMRCowes a duty to Parliament and to the Public AccountsCommittee. Is that correct?




Anthony Inglese: I have said—Stephen Barclay: You have just said it.Anthony Inglese: I have said that it is part of ourfunctions properly to assist Parliament, and we havetaken a view that it is lawful to pass—

Q512 Stephen Barclay: Please stick to the question.It even says on page 5 of the 19 October letter—sothis is not a trick question—that “HMRC recognisesthat it is part of its functions properly to assistParliament”, so can we just please stick to thequestions? I thought that you had already acceptedthis point. Can we just go again? Do you accept thatHMRC owes a duty to assist Parliament and thePublic Accounts Committee? Yes or no?Anthony Inglese: Yes.

Q513 Stephen Barclay: Good. Do you thereforeaccept that information can be provided that is non-identifying?Anthony Inglese: Yes.

Q514 Stephen Barclay: I thought that those were thetwo points that we had got to with the Chair. Wheredoes the legislation draw a distinction betweenidentifying and non-identifying information?Anthony Inglese: Because the legislation looks ateach disclosure—

Q515 Stephen Barclay: But can you refer to thelegislation? Where in the legislation is a distinctiondrawn between identifying and non-identifying? Canyou tell me which section that is?Anthony Inglese: That is the context of thelegislation, so if you look in sections 18 and 19—Stephen Barclay: No, it is not. There is nodistinction.Anthony Inglese: That is the advice that we believeis right, and that we have confirmed with the firstTreasury counsel. That is our legal advice, and it isthe advice that we act on.

Q516 Stephen Barclay: Can I come back to thequestion? There is no distinction drawn. Can you takeme to the section that draws a distinction betweenidentifying and non-identifying information?Anthony Inglese: It stems from the notion of whatone is disclosing, so one has to look at eachdisclosure; that is the point of the 2011 letter.

Q517 Stephen Barclay: No, the 2011 letter lists fivepolicy reasons, Mr Inglese, which I will come to, andwhich we can go through. Chief among them is thatof it having an effect on voluntary compliance, but theAct, on my reading, does not draw a distinctionbetween identifying and non-identifying information.The department is calling for five policy reasons,which we can come on to, but in law there is nodistinction, is there?Anthony Inglese: In law, one has to look at thespecific piece of information that is being disclosed.

Q518 Stephen Barclay: There is no statutoryjustification for the distinction, is there? There areperfectly reasonable policy reasons why you may

want to take a decision not to disclose, and we cancome on to those. The letter from Mr Hartnett sets outfive policy reasons, but there is no statutoryjustification for distinguishing between identifyingand non-identifying, is there?Anthony Inglese: The sentence that I read out is thesentence that says that we look at each specific pieceof information when it is being disclosed.

Q519 Stephen Barclay: I am asking for the law. Canyou take me to where in statute it defines a distinctionbetween the two?Anthony Inglese: The best answer that I can give, Ithink, is that one has to read the whole of this letterto get the context right.

Q520 Stephen Barclay: With respect, the letter is notthe law. The letter sets out a range of factors that arepolicy considerations. What I am asking you is wherein statute it says that. What we have here is a door;the door says that where there is a gateway, which is ifyou have a duty to assist Parliament, you can provideinformation. In the case of this Committee, thegateway is open. In statute, there is no distinctionbetween those two things. Referring to the letter is atotally different issue to what is in statute. Do youaccept that in statute no distinction is drawn? As Iunderstand it, you are general counsel for HMRC.Anthony Inglese: Yes, I am general counsel.

Q521 Stephen Barclay: As general counsel of thedepartment, do you accept that in statute there is nodistinction between identifying and non-identifyinginformation? Yes or no?Anthony Inglese: Looking at the context of thelegislation, there is a distinction.

Q522 Stephen Barclay: Can you take me to thedistinction?Anthony Inglese: I can take you to it, if you wouldlike, by looking at the letter.Chair: No, the letter is no good.Mr Bacon: It is the Act that we are after.Anthony Inglese: If I can pick out the highlights ofthe letter—Chair: We are not interested in the letter; we arelooking at the Act.Mr Bacon: It would be quicker if you went to theAct. That is the actual legislation.Anthony Inglese: In order to read the legislation—sections 18 and 19—one has to look at the legislationas a whole, and then one takes one’s meaning fromthe words used in the legislation and the purpose andthe context. That is how legislation is interpreted.

Q523 Stephen Barclay: There is nowhere in lawwhere it distinguishes between those two things, isthere? It is policy consideration, and we can come onto that, but in statute you are not prevented fromdisclosing.Anthony Inglese: No, it is more than policy.

Q524 Stephen Barclay: Where? You are a lawyer.Anthony Inglese: If you have the patience, I mustrefer you to parts of the letter, which are very clear.




Q525 Chair: Honestly, Mr Inglese, with the greatestrespect, the letter reflects the current policy of HMRC,with which we as a Committee have a problem. Youare trying to hide a policy behind an imperative oflegislation. If you can demonstrate to us that theimperative of legislation is genuine, you may find adifferent response from the Committee. It is no goodgoing back to the letter, because the letter is yourpolicy. What my members are drawing to yourattention is the legislation. Again, it is a simplequestion. You seem to find it really difficult to answerthese simple questions. Is there something in thelegislation that tells you that you cannot reveal detailsof a particular taxpayer, or is it policy?Anthony Inglese: It is more than policy; it is what thelegislation means. There are two levels to this. Thefirst level is whether the legislation allows us to passover indentifying information—whether we arepermitted to do that. To get there, one has to look atthe duty of confidentiality under section 18 and thecriminal offence under section 19. I am sorry if theletter acts as a red rag to a bull, but that is—Chair: This is the third question you have failed toanswer. Just to make it clear: you failed to come backon “Erskine May”; you have failed to answer whetheror not you agree with what seemed to me to be at theheart of the advice that you got from James Eadie asfirst Treasury counsel; and you are now failing toanswer whether there is a constraint on you inlegislation. You must recognise, as a lawyer, that thatis a pretty poor show so far, and we are only 20 or 25minutes in. We are happy to stay all night.Anthony Inglese: I am sorry if that is the impressionthat I am giving. I thought we were just about to startan interesting discussion between two lawyers aboutwhat a statute meant, and I can carry on with that.

Q526 Mr Bacon: I think we should pursue that point.I do not understand what you are saying, Mr Inglese.It is fairly clear to me, reading the legislation, thatthere are lots of circumstances in which disclosure ispossible. That is plain on the face of the Act.Basically, section 18, which you have referred to acouple of times, says in subsection (1): “Revenue andCustoms officials may not disclose information whichis held by the Revenue and Customs in connectionwith a function of the Revenue and Customs.”Subsection (2) then states: “But subsection (1) doesnot apply to a disclosure”, and it lists paragraphs (a),(b), (c), (d), (e), (f), (g) and (h) as exemptions to therule that information may not be disclosed. So thereare lots and lots of cases just under section 18 inwhich one can disclose information.The Act goes on to say in section 20 that “Disclosureis in accordance” with section 20 “if”—and it thengives a whole load of possible examples, one of whichis disclosure “to a person exercising public functions”.Lots of things are plain on the face of the Act, withregard to why disclosure may, in certaincircumstances, be allowable.Mr Barclay has been pursuing you for seven or eightminutes, perhaps longer, on the simple question ofwhere the statute draws a distinction between—I thinkyou said, Mr Barclay—identifying and non-identifying, and you have failed to answer him. You

have answered a different question, which he did notask, which leads me to believe, although I am notcertain of this, that the correct answer to Mr Barclay’squestion is that there is nowhere in the statute thatdraws a distinction between identifying and non-identifying. Is it correct that nowhere is a distinctiondrawn? I do not know why you are getting all thesenotes from people behind you; you are supposed to bethe general counsel for HMRC. You are the top dogin the legal area; in so far as one has legal dogs, youare the top one, so why you have these people woofingbehind you I am not clear. You are the one who shouldbe advising them, frankly. Is what Mr Barclay waspursuing correct? Is there no statutory definition thatdistinguishes between non-identifying andidentifying? Is that correct?Anthony Inglese: This legislation, as with alllegislation, takes its meaning from the purpose andthe context. Words such as “disclosure” and“functions” take their meaning from the context, andpart of the context is the criminal offence undersection 19. The letter—Stephen Barclay: Parliamentary privilege applies, theBill of Rights would apply, in terms of criminaloffence, but in any event—we have not gone into thedetail with Vodafone—that is information in thepublic domain. That gets us into the issue of policydecision. Even the letter from Mr Hartnett accepts thefact. He says, “Where there is a power to disclose”,which is obviously different from the position takenby Sir Gus O’Donnell letter to Edward Leigh, inwhich he said that we cannot disclose, much as wewould like to do so. Mr Hartnett is saying, “Wherethere is a power to disclose, a decision whether or notto disclose must be taken in respect of eachidentifiable piece of information”. So there is anacceptance in this letter which, indeed, talks about theneed “to reach (in summary) a reasonable decision.”The point is that in law you’re not prevented fromdisclosing, but the department is taking a decision,which it is perfectly entitled to take, at its owndiscretion as to whether it discloses. We then needto establish whether that decision is being exercisedreasonably or not. The point is that you are notprevented in law from disclosing.Anthony Inglese: As I was saying earlier, there aretwo levels. First, is it part of our function to discloseidentifying information? The letter says that it doesnot follow that it is properly part of our function, andthe question about whether it would be the case is farfrom free of doubt. Because of the potentially criminalcontext in which the question arises, it is entirelyappropriate for the Commissioners to take the viewthat they do not want to have that doubt.Stephen Barclay: You are saying that criminalsanctions apply. We are talking about passinginformation to Parliament, so parliamentary privilegewould apply.Anthony Inglese: It is also necessary to look at theother provisions of the Act that, for example—

Q527 Stephen Barclay: You have gone off on toanother point. Your point was that criminal sanctionsapply. Surely this would be covered by privilege?




Anthony Inglese: No, it is important to look at theother provisions because, for example, we complyfully with the NAO and expose all our papers to it.The NAO has constraints on it, but powers to disclose.Stephen Barclay: Again, that is an entirely differentissue. You have no choice over that; the NAO has theright to demand whatever information it needs. Wecovered that last time and it is absolutely irrelevantas to how you exercise your discretion. You have nodiscretion in terms of the NAO. The NAO, by law,can ask for whatever information it requires.Anthony Inglese: I haven’t commented on the secondlevel yet. At the first level, it is entirely proper for theCommissioners to take the view that this isn’t afunction because of the advice—

Q528 Chair: What isn’t a function?Anthony Inglese: That it is not a function to giveidentifying information. As the letter says, it is farfrom free—

Q529 Chair: Ever?Anthony Inglese: I think that one would have to finda highly exceptional case—

Q530 Chair: Well, in the minutes that we are goingto come back to in a minute, you said that particularsof the claim in the county court were publicdocuments and could be copied by anyone interestedin comparing the settlement sum with the claim. Isthat true?Anthony Inglese: I don’t—Q531 Chair: Is that true?Anthony Inglese: I am not going to comment on thecontents of that document.

Q532 Chair: Is that true, Mr Inglese? Is it a fact ornot a fact? You are not asked for a comment. Is thattrue? I will read it again. You are said to have saidthat the particulars of claim in the county court werepublic documents and could be copied by anyoneinterested in comparing the settlement sum with theclaim. Is that true? Are there public documents in thecounty court that could be copied by anyone interestedin comparing the settlement sum with the claim? Isthat true?Anthony Inglese: I’m afraid I cannot comment onthe content.Chair: Why can’t you? It is completely ridiculous.This is just an issue of fact. Can you say whether thatis true or not true?Anthony Inglese: I can say at a general level that ifthere is litigation in the county court, the documentswill be available.Stephen Barclay: It is here. I’ve got a comment onthe Goldman Sachs case. It is interesting—we maycome on to why you issue proceedings in the countycourt, which tends to get less reported than the HighCourt, given the value of the sum. The documents arehere; they are a matter of public record, as are the datain the Vodafone accounts that show the amounts ofassets it has. It is a policy issue about where you are,and there are various policy points concerning theimpact on voluntary compliance or the issue about theprosecution of officials. Those are policy questions. I

am very happy to spell out why I don’t think theyapply, but we have not addressed the starting point,which is the legal decision.Anthony Inglese: If I come on to that level, an issueset out in the letter says that if it were the case that afunction existed, that power would still have to bemade in a way that was consistent with both publiclaw principles and the department’s statutoryobligations.

Q533 Chair: Right, Mr Inglese, we are taking a veryunusual step this afternoon. From here onwards, weare going to examine you on Oath—that is a powerthat we have. The Oath will be administered by theClerk. I gather there are two forms of words that youcan give, which the Clerk will read out to you.Anthony Inglese: Can I have a minute’s time out?Mr Bacon: No, I don’t see why you should have aminute’s time out at all. This Committee has thepower to make witnesses give evidence under Oath,and we are doing so because we have not been ableto get answers otherwise, so I think we should just geton with it.Anthony Inglese: I swear by almighty God that theevidence I shall give before this Committee shall bethe truth, the whole truth and nothing but the truth, sohelp me God.

Q534 Chair: Thank you. I am no lawyer, but clearly,as you have taken the Oath, you will not want to giveanswers that are incorrect, because you might findyourself with an accusation of having committedperjury, as I understand it.May we now return to the minutes of the meeting onthe 8 December 2010 in your office, and can youconfirm whether they are correct?Anthony Inglese: I cannot comment on the contentsof the document, but it was prepared as an aide-mémoire by two of my litigating lawyers after ameeting that I held. The note was not cleared with me.You have heard my general reasons for notcommenting on the note itself, but if it helps theCommittee, I will tell you why I had the meeting andwhat I was trying to achieve, so that you canunderstand the context.

Q535 Chair: There are a number of bits that reallyinterest the Committee, but we will look at the finalsentence of that minute, which says, “AI”—you—“said he would always want to assist DH,”—MrHartnett—“but not if this were ‘unconscionable’.He”—you—“referred to the difficulty all those presentat this meeting were having in justifying a settlementwithout an interest element”. Is that correct? Did youconsider the settlement in that light? Was that acorrect reflection of your view of the settlement?Anthony Inglese: At that meeting, I was trying tounderstand what had happened. Mr Hartnett asked mefor advice. He said, “A mistake has been made, willyou advise me on what—”

Q536 Chair: He did not tell you then that a mistakehad been made; as I understand the chronology, it wasafter you had the meeting. Did you, at that time, inthat meeting, consider—even taking out the




“unconscionable”—the difficultly all those present atthe meeting were having in justifying a settlementwithout an interest element? Is that correct? Was thatyour view?Anthony Inglese: Having sworn the Oath, I do needtime to tell you the context, which is that I was tryingto understand what had happened. I did not knowanything about the—

Q537 Chair: You are trying to evade the questionagain, Mr Inglese. It is quite simple: was that yourview or not? It is a very simple question. Giving mecontext is a way—which I hate in this Committee—of evading an answer.Anthony Inglese: I am not evading the answer, butyou do not often get advisory lawyers coming to talkto you, and it is important that I have an opportunityto explain what I was trying to do at that meeting. Iwas trying to gather information about what hadhappened. We talked around what the case involved,because, by reaching a settlement in that case,effectively, a piece of litigation that we had on the gowas being de facto settled. So I had to speak to mylitigation lawyers, who were handling the litigation, toask, “What’s it all about? What’s going on? What doyou know? What are the issues?”, so that I could tryto understand what the mistake was.

Q538 Chair: You keep referring to a mistake. At thatpoint, nobody admitted to a mistake. At that point, didyou think that the settlement was unconscionable?Anthony Inglese: No, I don’t even believe that I usedthe word “unconscionable.”Chair: It’s actually in quotation marks.Anthony Inglese: I know, but I don’t believe—

Q539 Chair: Was it difficult for those present tojustify a settlement without an interest element?Anthony Inglese: I think that the juxtaposition ofthose things in that paragraph produces an unfortunateinterpretation that I believe is not the case.

Q540 Chair: You have a wonderful memory ofeverything except for using the word“unconscionable.” Is that right?Anthony Inglese: No, what I believe that thatsentence is getting at is that one of the things at whichwe looked at the meeting was to see whether a mistakehad actually been made. Sometimes, people say theyhave made a mistake, but then, when you think itthrough, you find that, actually, they had it right allalong. We talked it round, looked at what was goingon, and concluded that, as far as we were concerned,we believed that a mistake had been made.

Q541 Chair: What did you advise Mr Hartnett? Didyou advise him that the settlement reached wasbinding or not binding?Anthony Inglese: As Mr Hartnett has explained tothis Committee, I advised him on what the optionswere.

Q542 Chair: Did you advise him that it was binding?You are being so evasive. Was it a binding agreementor not a binding agreement?

Anthony Inglese: I am not being evasive.Ian Swales: Mr Hartnett has already asserted thepoint.Anthony Inglese: If I may say so, Chair, you have putthe question in a binary way. I advised that it wasopen to the department to go back and revisit thesettlement, or that it was open to the department tocarry on and accept the mistake.

Q543 Ian Swales: Does that mean non-binding, to anon-lawyer like me? That sounds like what you aresaying.Anthony Inglese: No, that is not a word I am using.

Q544 Mr Bacon: It was a word that Mr Hartnettused—that is the point. He said that the legal advice—one takes it that he was referring to the advice fromthe general counsel’s office and from you—was thatthe agreement could be unwound, or that you couldchoose to be bound by it. Mr Barclay said at the time,in question 37, “you accept that legally you were notbound by that decision. Legally you could haverectified it.” Mr Hartnett replied, “I received advicethat we could regard ourselves as bound by it, or notbound by it.” Does that refer to your legal advice?Anthony Inglese: It was my personal advice.

Q545 Mr Bacon: Let me clarify that that sentencethat I just read out was your advice.Anthony Inglese: My personal advice was that theycould bring back and reopen the settlement, or wecould go on and leave things as they were. Those werethe two options.

Q546 Mr Bacon: Indeed—you could let the thing lie.The words that Mr Hartnett chose to use were, “Ireceived advice that we could regard ourselves asbound by it, or not bound by it.” Mr Barclay said, “Inother words, you were not bound by it.” Is it notcorrect to say, following what Mr Swales asked amoment ago, that your advice was that HMRC wasnot bound to stick to the agreement? That is correct,isn’t it?Anthony Inglese: I have said previously that this isthe subject of a judicial review that will put thespotlight—

Q547 Mr Bacon: First, we have established thatthere are no proceedings—we established that earlier.I am just asking you about Mr Hartnett’s evidence lasttime, and you have already agreed that you were oneof the people who gave this advice. When we see MrHartnett saying, “I received advice that we couldregard ourselves as bound by it, or not bound by it”,was Mr Barclay correct when he responded, “In otherwords, you were not bound by it”? In other words, myquestion is whether it is correct to say that the advicewas that the agreement was not binding—yes or no?Anthony Inglese: And my advice was that we couldgo back and reopen.Chair: Your advice was to go back and reopen thenegotiations.Anthony Inglese: Or that we could—




Q548 Mr Bacon: Good, that’s clear—your advicewas that you could reopen it. Once again, we can, Ihope, get to the question that I asked. Was it correctto say that your advice was that the agreement wasnot binding—yes or no? I do not know why you havethis reluctance to answer a question when the answerseems obvious to everyone else.Anthony Inglese: I am doing my absolute best, withinmy constraints of legal privilege, to give you theheadline of my advice. The headline was that wecould go back and reopen.Mr Bacon: Thank you.Anthony Inglese: Or—that we could leave things andnot reopen.

Q549 Fiona Mactaggart: I’m interested in this. Iwasn’t at the earlier sessions, but this sounds to me asthough this advice was given by you after Mr Hartnettthought he had concluded a deal, but you said earlierthat this was part of your litigation strategy. Would itnot have been normal for him to have asked you foradvice before he went out to agree a deal, and if hedid not, why not?Anthony Inglese: The answer to the very firstquestion about the litigation and settlement strategy isthat this was a mistake—

Q550 Fiona Mactaggart: What was a mistake?Anthony Inglese: I was giving advice on the basisthat a settlement had been made, and a settlementunder the litigation and settlement strategy is a goodthing if settled appropriately. If a mistake is made, theadvice that I was giving was on the mistake, so theanswer to the second part related to whether, becausethere was litigation going on, the team should haveconsulted the litigating lawyers. The answer to thatquestion is yes, the team should have done.

Q551 Fiona Mactaggart: And did they?Anthony Inglese: They did not.

Q552 Chair: Can I get it clear? When you thought itwas a mistake, the litigation strategy was not properlyfollowed in this particular instance.Anthony Inglese: That is because it was a mistake.Chair: It doesn’t matter why. I accept that you say itwas a mistake, but the litigation strategy as set out inHMRC was not properly followed in this instance.Anthony Inglese: I am sure the team was doing itsabsolute best in good faith to follow the strategy, butit made a mistake.

Q553 Chair: Can I ask you a question? If you giveclear advice, and it’s not heeded, who do you go to?Anthony Inglese: The first port of call, if it’s notheeded, is that I would go to the person I gave it to.Chair: Yes, of course. They’re the ones who don’theed it. Go on.Anthony Inglese: I’m sorry. I probably don’t need tosay this to you, Madam Chair, with your experienceof Ministers and so on, but you go to the person youhave advised, and say, “Is something not clear aboutthe advice? What are you doing with it?” I’m notdrawing myself up to my full height, but in my verylong experience of working in many Government

Departments that usually does the trick, because weare working under a rule-of-law culture and peoplewant in their hearts to follow the rule of law, even ifsometimes it irritates them immensely, and they wantto question the legal advice. Sometimes the legaladvice needs to be questioned, so you go back to theperson and you say, “Is the advice not clear? Has itnot hit the target? Is there something you don’t likeabout it? What should we do about it?” You sit downand you talk it through with people. That usually doesthe trick.

Q554 Chair: And then? If it doesn’t do the trick, whodo you go to? In this instance, your advice was youhave permission for overturning the deal on whichthere was a handshake. In this instance, they didn’tlisten to your advice that they could return to it. Whowould you go to beyond Mr Hartnett?Anthony Inglese: My advice was listened to in thiscase. I said, “You can go back, or you cannot goback.” So my advice was listened to.

Q555 Chair: I see, so you cover yourself by notgiving clear advice. You can do, yes or no, andeverything’s all right. That’s not very strong advice.

Q556 Fiona Mactaggart: How does that complywith the litigation and settlement strategy, which instrong cases—and in view of the fact that the othercases, which were on all fours with this one, didconcede—says, “Settle for the full amount HMRCbelieves the tribunal and courts would determine orotherwise litigate.” How does it comply with that?Anthony Inglese: In this particular case, the aim wasto settle the case appropriately and a mistake wasmade. It was a mistake.Amyas Morse: I think you sort of slipped on a pointthere. I think I heard you say that normally the advicewould be taken before a settlement was made and theadvice was not taken before the settlement was made.You then gave advice about mitigating the mistakethat resulted from the settlement being made. Is thatright?Anthony Inglese: Yes.

Q557 Stephen Barclay: On the chronology, can weclarify what date you became aware that a mistakehad been made?Anthony Inglese: 7 December.

Q558 Stephen Barclay: So when Mr Hartnett shookor did not shake hands with Goldmans two daysafterwards—sorry, it was three days, because it wasthe weekend: he had the meeting on the Friday and hesaid he spotted the mistake on a Monday—he did notget in touch with you at that point?Anthony Inglese: I believe he got in touch with meas soon as he was able to. I do not think anythingturns on that.

Q559 Stephen Barclay: The chronology isinteresting, because I have always found it oddwhether the mistake was spotted before or after themeeting on 30 November. Can we go through thechronology? The meeting was held on 19




November—actually, why don’t you take us throughthe chronology? The meeting with Goldman Sachsand Mr Hartnett was on what date?Anthony Inglese: I believe it was 19 November.

Q560 Stephen Barclay: So the deal was done on 19November, yet you did not learn of the mistake until7 December, yet you are the chief lawyer advising onwhether this is a binding or non-binding deal. Can youtalk us through what happened after 19 November?Who first brought it to your attention? When did youfirst learn of a mistake having been made?Anthony Inglese: 7 December.

Q561 Stephen Barclay: Okay. Who brought that toyou? Was it Mr Hartnett or one of your lawyers?Anthony Inglese: Mr Hartnett.Stephen Barclay: So—

Q562 Mr Bacon: So—thank you, Mr Barclay, thisis totally relevant—when Mr Hartnett said in answerto question 33, which asked when he spoke to MrInglese, he said: “I think on the Monday”—that is,Monday the 22nd, after Friday the 19th—that waswrong, wasn’t it?Anthony Inglese: There was a point between—Icannot remember the dates at that point—thesettlement and 7 December where Mr Hartnett spoketo me.

Q563 Mr Bacon: Yes, but we are talking aboutMonday the 22nd. The meeting occurred on Fridaythe 19th. Mr Hartnett said, in response to my questionasking him when he spoke to Mr Inglese: “I think onthe Monday, but I need to check, Mr Bacon. I’msorry.” I asked him: “You think it was the 22nd, afterthe Friday.” He said: “Very soon after, yes.” Well,actually, we are talking about a couple of weeks, some15 days after. If you did not find out until 7 December,that is a couple of weeks. I know that Mr Hartnett wastravelling—we established that he was abroad most ofthat week—but there are telephones. You are tellingus that you did not find out until 7 December.Anthony Inglese: I did not find out until 7 December.

Q564 Mr Bacon: That makes sense, because youimmediately convened a meeting, which took place on8 December. That is right, is it not?Anthony Inglese: On 7 December, I started to gatherinformation. I convened meetings on 7 and 8December. There is one other thing. I heard about thecase from Mr Hartnett before 7 December. In thatconversation he said to me: “One of the cases that youare litigating has just settled.” At the time, I did notthink any more of it.

Q565 Stephen Barclay: Did he tell you what caseit was?Anthony Inglese: He might have done, but—I am nottrying to be funny—we have 8,000 cases, and if I donot need to know, I do not ask.

Q566 Stephen Barclay: Can you clarify whether,ahead of today’s hearing, you read the minutes of the30 November meeting?

Anthony Inglese: Which meeting was that?Stephen Barclay: That was the high-risk groupmeeting that was held on that date.Anthony Inglese: I think I read them, but I don’t havethem in front of me.

Q567 Stephen Barclay: I presume that there is adetailed minute of that meeting.Anthony Inglese: I cannot recall that. I do not have itin front of me.

Q568 Stephen Barclay: Well, it’s difficult to read itif it doesn’t exist, but one would assume a meetingof that gravity would have minutes taken. Do thosemeetings usually have minutes taken?Anthony Inglese: Yes.

Q569 Stephen Barclay: But you haven’t read themprior to coming today?Anthony Inglese: I have read them, but I don’t havethem in front of me now.

Q570 Stephen Barclay: So they do exist. Was anyof your team at that meeting?Anthony Inglese: Yes.

Q571 Stephen Barclay: Did any discussion takeplace around the Goldman Sachs deal at that meeting?Anthony Inglese: Yes.

Q572 Stephen Barclay: Was the mistake spotted ordiscussed at that meeting on 30 November?Anthony Inglese: I believe so.

Q573 Stephen Barclay: So at the meeting on 30November, the mistake had been identified then, morethan a week before Mr Hartnett telephoned you?Anthony Inglese: Mr Hartnett spoke to me on 7December.

Q574 Stephen Barclay: Sure. Did no one from yourteam communicate that a mistake had been made, onsomething of this gravity, between 30 November and7 December?Anthony Inglese: Did anyone from my team tell me?Stephen Barclay: Yes.Anthony Inglese: No.

Q575 Stephen Barclay: So your team—yourlawyers—went to a meeting where they establishedthat a serious mistake had been made, but they didn’ttell you, as general counsel?Anthony Inglese: My lawyers are appropriately seniorand they can engage on this sort of thing if necessary.They don’t need to tell me everything.

Q576 Chair: We don’t know the precise sum, but thisis £8 million to £10 million of taxpayers’ money gonemissing. That’s a lot of money. That’s jolly serious.Anthony Inglese: At the time, I am assuming from—Q577 Chair: But you consider that serious, don’t you,Mr Inglese?Anthony Inglese: At the time, people were looking atthe mistake and working out what to do—




Q578 Chair: Yes, Mr Inglese, but you agree with theCommittee’s view that whatever the sum is, £8 millionto £10 million is a lot of money?Anthony Inglese: Of course it is.Chair: Right. It is serious. I would have expectedsomeone on my team, had I been their boss, to tell me.Q579 Stephen Barclay: In terms of the discretiongiven to your team—we have been focusing onGoldmans, whereas the bigger-value item was theVodafone settlement and the mystery as to how thefigure of £1.25 billion was arrived at—did your teamprovide legal advice on whether £1.25 billion was thecorrect amount?Anthony Inglese: Sorry, I missed the first part.Stephen Barclay: The Vodafone settlement was for£1.25 billion. Did your legal team advise on whetherthat was the correct amount of tax due?Anthony Inglese: As Mr Hartnett is saying, lawyerswere involved throughout, at different stages of that.

Q580 Stephen Barclay: Sure. I appreciate thatlawyers were involved—I would assume that lawyersdrew up the contract, so it is a statement of theobvious, to an extent, to say that lawyers wereinvolved. What I am saying is that you alluded to, interms of your answer to the Goldmans meeting, thefact that you have senior lawyers to whom you givediscretion as a result of their expertise. Are you a taxexpert yourself?Anthony Inglese: I am not what you call a tax lawyer.

Q581 Stephen Barclay: And the three lawyers youhired—the three people beneath you—are they taxexperts?Anthony Inglese: The three directors whom I have,who have come to work for HMRC under fair andproper procedures—rather than people whom I’vehired—are not what you would call tax experts.

Q582 Stephen Barclay: I am sure that it was fair andproper; I wasn’t suggesting otherwise. We discoveredat the last hearing that there is only one taxCommissioner who actually has detailed knowledgeof tax. What you are saying is that out of generalcounsel and the three senior lawyers hired, none ofthem are tax experts.Coming back to the Vodafone settlement at £1.25billion, it may be perfectly logical therefore, if youare not a tax expert, for you to give senior lawyerswithin your area a degree of discretion. What I amtrying to establish is whether they advised, with theirexpertise, that £1.25 billion was the correct amount.Anthony Inglese: My answer to that is as before: Ican confirm that lawyers were involved throughout,but I cannot go into any more detail.

Q583 Stephen Barclay: Okay. I think the quantumis much more important than Goldman Sachs.Between 2001 and 2011, as far as Vodafone isconcerned, we are looking at in the region of £25billion in profits. The settlement—the 30%; obviously,it came down in the latter years—seems strange on anumber of levels. First, it includes the 2011 and 2012profit, but given that the settlement was reached in2010, I would welcome your thoughts on how they

knew what the profit would be for 2011 and 2012,given that those profits had not been realised. Also,the £1.25 billion looks like it has been based on about20% of Vodafone’s profits. That means the Exchequermay have lost around £8 billion in tax, which makesGoldmans look paltry in comparison.The reason why I am saying that is that potentially—we cannot get the figures, because Mr Hartnett willnot answer the questions—we are looking at £8 billionof tax lost, a company that was given five years topay even though it was sitting on a cash pile and asettlement based on future profits that were unknown,even though the department does not allow suchconsiderations to be given and the legislation had notbeen passed by Parliament, so the department couldnot have given undertakings. I am trying to establish,Mr Inglese—although you and your deputies mightnot be tax experts—who among your lawyers wasadvising Mr Hartnett, so that we can satisfy ourselvesthat the £1.25 billion was correct.Anthony Inglese: I am afraid I cannot comment onthat.

Q584 Stephen Barclay: Why not?Anthony Inglese: Because that is covered by legalprivilege, and I cannot comment. I would like to saysomething about the fact that you keep mentioning taxexpertise. Can I do my job without being a taxlawyer? Of course I can.

Q585 Fiona Mactaggart: Can you do it well withoutbeing a tax lawyer?Anthony Inglese: Yes, I can, because I have lots oftax lawyers who know a lot about the technicalities.

Q586 Stephen Barclay: But we don’t know whatinvolvement they had. That is the issue. We don’t evenknow if interest was charged on the £1.25 billion. Oneassumes it was not, because Vodafone released £900million that they had set aside. They stopped settingmoney provision aside in 2006, incidentally, probablyassuming that they were going to win the case, andthen found that they did not. They would have had toset aside far more, had they known they were goingto lose the case. But we do not even know whatinterest the £1.25 billion included. Are you able totell us?Anthony Inglese: I cannot comment on any of that.

Q587 Stephen Barclay: But who were the expertsfrom your department that were providing the taxlegal advice to Mr Hartnett?Anthony Inglese: All I can say is that lawyers wereinvolved throughout. That is all I can say.

Q588 Chair: But not in-house lawyers. You soughtadvice from paid lawyers outside the service—moreconsultants?Anthony Inglese: Again, I cannot comment onspecific cases, but where necessary—obviously, wherethere is litigation, we always involve counsel.

Q589 Chair: You said how many cases of litigation?Anthony Inglese: We have 8,000 cases on the booksat the moment. Where there is litigation, obviously,




counsel approved by the Attorney-General is alwaysinvolved. Sometimes, in cases where we want specialadvice from a silk or a skilled counsel, we bring inexternal counsel through the solicitor’s office.

Q590- James Wharton: Mr Inglese, I have listenedvery carefully to the evidence you have just given toMr Barclay. I apologise, as I am sure this is a matterof my failing to interpret the discussion properlyrather than of an evasive answer on your part. Can Itake you back a couple of steps to the gap betweenwhen your lawyers became aware of the issue and youbecame aware? Mr Barclay asked you if your lawyershad told you, and you started to explain that thepeople who work for you are sufficiently senior tomake decisions, operate and so on. I may have missedit, but I do not think you actually gave a direct answer,a yes or no, to the question whether they told youor not.Anthony Inglese: I think I said no.

Q591 James Wharton: Sorry. It is my fault if that isthe case. I may have missed that. They did not.The other question—again, I will keep it very brief—is slightly to the side. One issue that we have lookedat, apart from the fact that we often cannot discusswhat is in notes and cannot get the information weneed as a Committee properly to assess what has goneon, on the basis of documents that we none the lesshave, can you tell me whether proper records of MrHartnett’s meetings with big companies are now beingkept, and whether, on your advice, there have beenany changes in procedure so that proper and verifiablerecords are kept in future?Anthony Inglese: That’s really more of a question forhim, but I expect he’ll say yes when you ask him.

Q592 James Wharton: Allow me to rephrase it. Hasthere been a discussion about the quality of recordkeeping on which your advice has been sought whichmay change the procedure, so that when we next askhim, we know what, if any, your involvement hasbeen?Anthony Inglese: We have had a discussion aboutwhether, in the previous case we were talking about,lawyers should be consulted before a settlement, sothat the submission for Mr Hartnett on the settlementwould include the views of the litigating lawyers andthe record would have—

Q593 James Wharton: And have you had adiscussion on the sorts of records that should be keptof Mr Hartnett’s meetings with private companies,with taxpayers—whatever it might be?Anthony Inglese: No, I have not.

Q594 Austin Mitchell: I have just a couple of factualquestions. I’m not a lawyer, although I admire yourability at fencing. It’s better than the AustrianArchduke before the collapse of the empire.It was agreed in a previous session that GoldmanSachs was warned that if it persisted in resisting,which it did, it would be liable for interest. It resistedfor five or six years. Did that warning come from you,

or was it just a routine thing passed on as a threateninggesture by HMRC?Anthony Inglese: That was in the litigation that wasbeing brought.

Q595 Austin Mitchell: Right, but you wereconsulted in the issue of that warning?Anthony Inglese: I wasn’t in HMRC at the time. Thatwas 2005.

Q596 Austin Mitchell: Okay, but it would takeadvice from its legal people in issuing that warning?Anthony Inglese: Well, it was part of the litigation,so the lawyers and counsel would have been involved.

Q597 Ian Swales: It would be normal practice in anycase. Wouldn’t it be normal practice to do that? Itwasn’t a one-off decision that Mr Mitchell is referringto. Isn’t it normal practice in litigation of that natureto charge interest?Anthony Inglese: It depends. If I can come away fromthat case, it depends on whether it is appropriate andthe litigation settlement strategy says that we wouldnormally charge interest where there is a crystallisedsum of tax due.

Q598 Austin Mitchell: Okay. We now come to themeeting in December. Mr Hartnett told us in theexamination on 12 October that he had consulted you:“There were a number of issues to be taken intoaccount. Mr Inglese said to me that there were twoentirely acceptable approaches in law”—we’ve agreedthat—“one was to stay with the proposed settlementand one was to put it to one side.” You’ve agreed that?Anthony Inglese: Yes.

Q599 Austin Mitchell: Okay. Was that meetingminuted? Mr Hartnett didn’t know.Anthony Inglese: The meeting with Mr Hartnett itselfwas not minuted.

Q600 Austin Mitchell: Okay. Did you express anypreference or offer any advice as to which of thesetwo courses should be followed?Anthony Inglese: I gave the options—what theoptions were. It was then very much for theCommissioners to decide, on the basis of the relevantfacts, which was the preferred option.

Q601 Chair: Lawyers usually give advice as well asoptions. Did you give advice?Anthony Inglese: I—Chair: You are on oath.Anthony Inglese: I am on oath, and I did not givelegal advice.

Q602 Chair: Well, what sort of advice did you give?Austin Mitchell: What advice did you give?Q603 Mr Bacon: Did you express a preference?Anthony Inglese: Yes, I did.

Q604 Mr Bacon: Which of the two did you say wasthe preferable option?Anthony Inglese: I have no vote in these matters.Mr Bacon: I understand—




Q605 Austin Mitchell: But your preference wasfor—Anthony Inglese: But my preference was for notgoing back.Q606Chair: Not going back?Anthony Inglese: Not going back.

Q607 Mr Bacon: Even though the litigation strategyis clear that in the right kinds of case, it would benormal to charge interest?Anthony Inglese: Because a mistake had been madeand the question then was, having made a mistake—this is not the most uncommon of questions all overGovernment organisations all the time—we have tofind a way of coming up with the best solution thatdoesn’t make things worse.

Q608 Chair: Is it true, Mr Inglese, that in July 2010you received advice from Malcolm Gammie that theGovernment’s position was strong and that you couldbe confident about getting all the money owed to thetaxpayer, including interest?Anthony Inglese: All I can say is: a mistake wasmade.

Q609 Chair: Is that true—that you got that advice?Anthony Inglese: I’m honestly not sure if I can saywhat advice we got because—Chair: Well, it’s in the public domain, so you mightas well say whether it’s true.Anthony Inglese: The thing I can say is: we werecarrying on with the litigation but then there was a—

Q610 Chair: I assume from that that it is true.Can you also tell me whether it is true that in April2010 there was a judgment in the British VirginIslands in which the judge dismissed a claim that theemployer of the bankers—Goldman Sachs—was inthe Virgin Islands?Anthony Inglese: I would have to write to you aboutthat.

Q611 Chair: Why? Because you can’t remember? Ican’t believe that in preparing for this hearing thisafternoon, which I hear you spent a lot of hours on,you don’t know the answer to that one.Anthony Inglese: I think I may know the answer, butI just want to make sure that what I can say is right.

Q612 Chair: What do you think the answer is?Anthony Inglese: What do I think?Chair: It’s either true or it isn’t.

Q613 Mr Bacon: You’ve just said that you think youknow the answer. What do you think?Anthony Inglese: I would prefer to be allowed towrite to you on that one, to make sure that—

Q614 Mr Bacon: We accept that you are not 100%certain, but the question is: what do you think theanswer is?Anthony Inglese: When the question is put like that,I am just not sure. So instead of being po-faced andsaying, “I really don’t know”, I think I might knowbut I do need the opportunity to write.

Mr Bacon: Well, we need the opportunity to get theanswers, and you are under oath, Mr Inglese.Anthony Inglese: I promise I will write very soon,because the answer is out there, but I just—

Q615 Chair: Can I come back to a question I askedyou before? Is it true that the particulars of claims inthe county court are public documents and could becopied by anyone interested in comparing thesettlement sum with the claim?Anthony Inglese: Is that the same as the question youwere asking before?Chair: I’m asking it now, when you are on oath.Anthony Inglese: I believe from what I have heardfrom my litigating lawyers that that is indeed the case,that the public can see them.

Q616 Chair: If that is the case, can you thereforetell us what the claim was and what the settlementsum was?Anthony Inglese: No, I can’t.

Q617 Chair: Why not? If it’s in the public domain,can’t you tell us?Anthony Inglese: I can’t tell you what the settlementwas.

Q618 Chair: Sorry, but to go back again, you havesaid it is true that these are public documents thatcould be copied by anyone interested in comparingthe settlement sum with the claim. So if it is true thatthey are in the public domain, could you help theCommittee by telling us what the claim was and whatthe settlement sum was?Anthony Inglese: If a figure is in the public domain Ican help the Committee by writing to it with thatfigure, but I do not believe that the settlement figureis in the public domain.Chair: Well, it says, “could be copied by anyoneinterested in comparing the settlement sum with theclaim.” “Settlement sum” with “the claim”—those arethe two figures I am asking for, and you said youcould get them because they are in the public domain.Anthony Inglese: No. I can certainly write to theCommittee about anything that is in the public domainthrough the county court.Q619 Chair: Can those people passing you endlessnotes from behind tell us what those two figures are,to help the Committee this afternoon?Clearly they don’t want to.

Q620 Stephen Barclay: In terms of Vodafone, couldyou clarify whether with the settlement any discretionwas exercised over the £1.25 billion, or was that thecorrect amount in law?Anthony Inglese: I’m afraid I cannot go into that; Icannot comment on it.

Q621 Stephen Barclay: I am just asking from a legalprocess point of view whether any discretion wasexercised.Anthony Inglese: I can say at a general level thatwhen a settlement is reached it is reached byagreement.




Q622 Stephen Barclay: But Mr Hartnett said that nodiscretion was exercised: he did not take a penny lessthan the correct amount in tax. As a matter of law, Iwant your confirmation as to whether that iscorrect1.Anthony Inglese: It is my understanding that it iscorrect.

Q623 Stephen Barclay: So, no discretion overinterest was exercised?Anthony Inglese: My understanding, from speakingto all my colleagues, is that the Vodafone settlementwas correct.

Q624 Fiona Mactaggart: We have learnt that youare a cautious lawyer from the way in which you haveresponded to us, and I am wondering what advice yougave to Mr Hartnett before he went to talk to GoldmanSachs, and whether you think he followed it.Anthony Inglese: I wasn’t involved in the settlementat all.

Q625 Fiona Mactaggart: That was not what I askedyou. I asked you what advice you had given himbefore he went to talk to Goldman Sachs.Anthony Inglese: Sorry, I wasn’t involved in theGoldman Sachs matter at all until I was asked foradvice on the mistake.

Q626 Fiona Mactaggart: He never asked you foradvice in advance?Anthony Inglese: I personally was never asked foradvice in advance.

Q627 Mr Bacon: And nor were any other lawyers,were they? Mr Hartnett made that clear.Anthony Inglese: I have just said that.

Q628 Mr Bacon: No, you said you; but it is correct,isn’t it, that no other lawyers were asked either?Anthony Inglese: Sorry, I think that I have missed—

Q629 Mr Bacon: One of the things that struck me inyour answers to Mr Barclay about Vodafone was thatyou said that lawyers were involved throughout. Oneof the issues in relation to the Goldman Sachsnegotiations was that lawyers were not involved. Soit is no surprise to me to hear that you were notinvolved. I was just getting you to confirm that nolawyers were involved. In a recent evidence session,when I asked Mr Hartnett whether there was a legalerror in thinking that you could not charge interest, hesaid, “Yes”. I then said, “Whereas you actually could.”That is to say, that you could charge interest. Then Iasked him, “In coming to the conclusion that youcould not charge interest, did you consult lawyersabout that?” Mr Hartnett said, “No”. It was not justthat he did not consult you; he did not consult lawyers.Yet in the Vodafone case, lawyers were involved1 Having looked at this answers to Q396 and Q3967 in the

uncorrected transcript, Mr Inglese has realised that he did notregister that Mr Barclay prefaced his question at Q396 with“as a matter of law”. A Mr Inglese made clear on a numberof occasions during the course of the hearing he was unableto offer a legal view on the case because he was bound bylegal professional privilege.

throughout. If he had consulted lawyers, he wouldhave presumably been told that the apparent legalimpediment to the charging of interest—a rather oddapparent impediment anyway, as charging interest isfairly standard, as we’ve established—was no suchthing. There was no impediment, and one couldcharge interest. That’s correct, isn’t it?Anthony Inglese: Sorry, that is a very long question.That’s correct at the end?

Q630 Mr Bacon: It is correct that there was noimpediment?Anthony Inglese: I think—

Q631 Mr Bacon: Sorry, it was a long question. Letme break it down. It is correct to say that there wasno impediment to the charging of interest?Anthony Inglese: I can’t comment on that.

Q632 Mr Bacon: Okay, but it is certainly correct thatneither you nor any other lawyers were consulted?Anthony Inglese: I have already said that one of thethings that Mr Hartnett and I have discussed as alearning point is that where there is litigation afootand a settlement discussion takes place, it is alwaysgood practice to consult the litigating lawyers in casesomething is there.

Q633 Mr Bacon: Yes! You have answered what tome is one of the most astonishing sentences. It isblindingly obvious to everyone—except, apparently,to Mr Hartnett—that what you have just said issensible and good practice. Mr Hartnett said to you,“Oh, one of those cases—it’s settled.” To say thatwithout having talked to a lawyer about the terms onwhich it is settled is one of the most extraordinaryaspects of this. Do you not think that it should be notjust good practice but required that when HMRC issettling cases, legal advice is obtained?Anthony Inglese: I think that where there is a pieceof litigation on the go—I need to take a step backbecause obviously, I am going to say yes to that—onehas to remember that in HMRC our clients, if I cancall them that, include many thousands of highlyskilled tax professionals. They know quite a bit of lawas well, and they have the carriage—in other words,they have the lead—on all these cases. They are theones whom the lawyers work to. They involve lawyerswhen it’s in their judgment that they need to. I won’tspend any time now on it, but there are lots of verygood reasons why lawyers should be involved. Thereare also lots of cases where a settlement discussion istaking place and the law is well-trodden: it’s about thefacts and it’s about accountancy; lawyers don’t needto be involved. The main thing that I sought to helpthis Committee with right at the beginning is that it’sa fallacy to think that every single settlement needsto have heavy legal involvement. But where there islitigation, then yes, because the lawyers should beable to offer advice on maybe a key issue in thelitigation, or maybe costs or something like that.Chair: That is very helpful.

Q634 Mr Bacon: Particularly when the bone ofcontention—for example, whether or not interest was




payable—was that HMRC had threatened that if aparticular client held out, in the way that GoldmanSachs did, interest would continue to be payable. Thatwas one of the nubs of contention, wasn’t it?Anthony Inglese: I do not want to go into that case,but every case has something and it is always worthchecking what that thing is that people need to lookout for when arriving at a settlement.

Q635 Chair: In thanking you for your evidence, canI just ask two very short final questions? Given that amistake was made, do you agree that the courts shouldquash the settlement and then reconsider it on a properlegal basis?Anthony Inglese: That is the subject of this imminentjudicial review.

Q636 Chair: Well, there is not a judicial review, butdo you agree that that would be the best way forward?Anthony Inglese: I cannot comment on that. There isan imminent judicial review, and I expect the


Witnesses: Dave Hartnett, Permanent Secretary for Tax, HMRC, and Sir Gus O'Donnell, Cabinet Secretary,gave evidence.

Q639 Chair: Welcome. Sorry to have kept youwaiting. It is a bit cold in this room, so you wereprobably warmer in the corridor. Can I start with you,Sir Gus? Do you accept—Sir Gus O'Donnell: May I say, Madam Chair, that,after our meeting, there are a couple of things that Ican update the Committee on? Could I do that first—a bit of news for you that might be interesting?

Q640 Chair: Go on.Sir Gus O'Donnell: As you know, we talked aboutoversight and the accountability of large tax deals. Wehad those discussions and talked about some waysforward. One of the issues you raised was the issue oftax Commissioners, and I am pleased to be able toannounce that the Queen has approved two new taxCommissioners: Steve Banyard, the acting directorgeneral for personal tax, who started life as a taxprofessional in the Inland Revenue, has been there allhis life and has a deep knowledge of tax; and SimonBowles, the chief finance officer in the department,who is an accountant by profession, for which Iforgive him, because he was at Trinity College, wherehe read economics—that is close to my heart. So thereare two new Commissioners, which I think is good.Secondly, as you know, David has written to youabout the whole issue of how we move this forwardin terms of having some extra accountability, in termsof external professional input into these large deals,and of how we extend the oversight. If you wouldlike, you could go into more detail about those,because he gave just the outline in that letter. Therewas not time, but the plan will be to work on gettingthat process in place and having some final proposalsgo to Ministers by the end of the year. It would begood to get your reaction to that, but if want Dave

application will happen soon. HMRC will beresponding to the pre-action protocol letter with aletter of our own, and at the moment we are stillconsidering it.

Q637 Chair: It is a pre-action. Can I just ask a veryfinal question? I understand that you were obviouslyconcerned with giving evidence on an issue like this.Can you just tell the Committee how much taxpayers’money was spent coaching you for today’sappearance?Anthony Inglese: Zero—I hope it does not show.

Q638 Fiona Mactaggart: Chair, can I squeeze in onesmall question? Would it not be in the interests ofthe taxpayer not to contest this judicial review, but toconcede, to collect the tax that we are owed becauseof this mistake and to not spend money on lawyersdefending a judicial review?Anthony Inglese: I cannot comment on that.Chair: Okay, thank you.

to go into the details, I am sure he will be happy todo that.

Q641 Chair: Okay, I am sure we will come to that.I really am grateful for that and for the meetings thatboth Mr Hartnett and you held with a representativegroup from the Committee. In a way, however, thosewere private and it is important that we get some ofthe stuff on the public record. Let me start by sayingthat I think that “Commissioners” is a misnomer,because it suggests to both Parliament and certainlythe public that there is a bunch of people overseeingthe work of HMRC who exist outside the executivestructure of HMRC, and that is not right. The twoCommissioners that you have announced both havetax experience, which is welcome, but they are bothpart of the HMRC structure, are they not?Sir Gus O'Donnell: Indeed, yes.Chair: I think that is a problem. It brings me to thekey issue—I hope you will accept this, because thenwe can have a discussion about how we take theprocess forward—that there are structural problemswith the present settlement of how HMRC administersitself, particularly in relation to tax disputes with largecorporate bodies. I will present those as two issuesand I wonder whether you will accept them on therecord. One is that we have to have a properseparation between those who negotiate a particulardeal with a corporate body and those who authorisethat deal, hence my concern about the Commissioners.Indeed, I think that, in 75% of the cases that werelooked at by NAO, there was no separation betweenthose who negotiated the deal and those whoauthorised it.Dave Hartnett: Chair, I am sorry, but that is notcorrect.




Chair: There was no proper separation in 75% of thecases. I would give you the quote, but I have notbrought it, because I did not think it would be ofcontention. It was in paragraph 11 of the NAO Report.I have not brought it, but I have a bit of a memoryfor it.Sir Gus O'Donnell: I think it’s the other way around,Madam Chair. I think that 75% were fine.Chair: No.Paul Keane: We looked at 27 cases all together. Therewere four where the department put in place specificgovernance arrangements—this is paragraph 11—andin three of those four, one or both of theCommissioners were involved in both negotiating thecase and approving the settlement.

Q642 Chair: Three out of four is 75%. You mightsay that it is not a representative sample, but it is 75%of the ones they looked at. That is the first issue. Thesecond is that, when you are talking about £25.5billion, which, again, is the figure in the NAO Report,there has to be a proper system of accountability forthose settlements to Ministers and to Parliament—asystem that is independent of the machinery ofgovernment that is responsible for it. Do you agreethat those are the two structural issues with which wehave a problem?Sir Gus O'Donnell: Yes. I think it would be fair toexplain the context. This is in a world in which weare moving towards doing the large settlements in avery different way from how we used to. That hasresulted in very big increases in revenue. I would liketo put on the record my thanks to Dave Hartnett forthe things that HMRC has done. We would be in areally bad situation if we had not got the extra billionsthat have been achieved through some of the thingsthat the Revenue has got through in the past few yearssince the merger.

Q643 Mr Bacon: Are you saying that we are not ina bad situation?Sir Gus O'Donnell: We are in a less bad situationthan we would be.Mr Bacon: All the newspaper headlines say that weare in a very bad situation.Sir Gus O'Donnell: Well, we are not in the euro, MrBacon.

Q644 Mr Bacon: Thank goodness. But that moneycoming in also depends on how much is being lostthrough the settlements.Sir Gus O'Donnell: Indeed, but I would say that thereal savings of £1.4 billion, starting at a time whenstaff are being cut by about a quarter—Mr Bacon: No, no.Sir Gus O'Donnell:—when compliance increaseshave gone up and there is a reduction in the tax gap,all those sorts of things are big, objective, real billionsof pounds of savings. To come back to your question,Madam Chair—it is important that we answer thequestions that are put to us—first, on the negotiationsand trying to get the appropriate degree of separation,absolutely, there is work in hand to do that. I agree.As we evolve through sorting out how to get the bestout of these things, that is exactly right. We need more

tax Commissioners to do this, which is why the pointthat I made right at the start is the crucial one.Secondly, the question of external independence is avery good point. I discussed with you how do weensure that we can get some external, professionaloversight that can look at individual cases.

Q645 Chair: You will get a lot of opportunity to tellus what you are doing, Mr Hartnett. Sir GusO’Donnell, can I come to you with this? As head ofthe civil service, what is your priority? Is it to protecttaxpayer confidentiality, or to protect the publicinterest in ensuring that moneys are due to theExchequer?Sir Gus O'Donnell: It is absolutely not an either/or.Both.Chair: Okay, but at the moment, it is.Sir Gus O'Donnell: No it’s not.

Q646 Chair: Because in the evidence that we havehad from HMRC, taxpayer confidentiality has takenprecedence over our duty to protect the public interestin terms of ensuring that we get the revenue.Sir Gus O'Donnell: There is a statutory requirementon taxpayer confidentiality—we do not want civilservants breaking the law, that is certainly true. But itis absolutely crucial that when it comes to individualcases, the National Audit Office has complete accessto all the papers—no ifs, no buts; it gets to see themall. I hope that the NAO, as I detect, gets absoluteaccess to all the papers.Amyas Morse: Yes.Sir Gus O'Donnell: That is exactly as it should be.

Q647 Stephen Barclay: Of course, no one wouldwant civil servants to break the law; that is a statementof the obvious. If there is a gateway that permitsdisclosure, they wouldn’t be breaking the law, wouldthey?Sir Gus O'Donnell: No.

Q648 Stephen Barclay: So could we come to thepoint about what in statute prevents you fromdisclosing information to Parliament?Sir Gus O'Donnell: I will be governed byprofessionals on that.Dave Hartnett: Mr Barclay, as I have said before, Ithink we agreed at the last sitting that providingassistance to Parliament is one of our functions. Butit is quite a big step from providing assistance toactually providing detailed information aboutindividual taxpayers. As I think we explored before—this is in my letter to the Chair; I’m sorry, I can’tremember the date but it was when I set out the lawon taxpayer confidentiality—the Commissioners ofHMRC have a role in determining the approach totaxpayer confidentiality, and in 2009 they made adecision about that. Last time we also explored verytentatively whether there was a way of having aconfidential briefing before the Committee, which wasmaybe manageable within the general strictures butdid not become public.

Q649 Stephen Barclay: Sure, but those are differentissues. If a mistake has been made or the law has been




broken, does Parliament not need to know so that itcan consider whether the law needs to be amended?Dave Hartnett: Taking a mistake that we havediscussed before, Parliament does know about itbecause the NAO reported it.Chair: No, Parliament knows about it because TheGuardian reported it, and Private Eye—not becausethe NAO reported it.Paul Keane: We did report a mistake in the Reportwe just produced—Chair: But that was after The Guardian.Paul Keane: No, it’s in the Report.

Q650 Stephen Barclay: But we don’t know the sizeof the mistake; we don’t know the value of themistake.Dave Hartnett: With respect, didn’t Mr Morse giveyou a number at the last hearing?Chair: A range.Can I just put it to you this way? If it had been a grantto Goldman Sachs of anything between £5 million and£10 million, or whatever, we would all know aboutthat. That would be in the public accounts. In effect,this is a grant—the forgoing of interest is a grant—yet we don’t know.Sir Gus O'Donnell: I think it has been very clear. Itwas in the Report. You were told about it.

Q651 Stephen Barclay: We are trying to establishthe legal position rather than the NAO view. From alegal position in terms of statute, I will come to thequestion that I put to Mr Inglese: is there anydistinction between identifying and non-identifyinginformation in the 2005 Act?Dave Hartnett: I cannot recall a clause that says that,but—this won’t surprise Mr Barclay—we have lookedback over tens of years, decades even, to see howtaxpayer confidentiality has been applied, and it hasconstantly been applied like that. This goes back toyour point about the role of the Commissioners, andthey have made a distinction between identifying andnon-identifying information.

Q652 Stephen Barclay: But we were not looking atthe historic legal position. You have been quoting the2005 Act, which does not draw a distinction, so it ispolicy reasons that go to the heart of why you are notdisclosing. The point is, you have discretion, but theargument you have been putting repeatedly is that bylaw you are prevented by the 2005 Act fromdisclosure, and yet that Act has a gateway, so do youaccept that you are not prevented from disclosure bythe 2005 Act?Dave Hartnett: All my advice so far has been that mycolleagues and I are prevented by the Act and by thedecision of the Commissioners.

Q653 Stephen Barclay: Even when information is inthe public domain.Dave Hartnett: Even when information is in thepublic domain, unless it is in the public domainlawfully.

Q654 Stephen Barclay: Well, one assumes thatappearing in Vodafone’s company accounts is lawfuldisclosure in the public domain.Dave Hartnett: Frankly, it depends what appears inVodafone’s accounts.Chair: I shall go to Ian and then I want us to get backto the principal stuff before we come to the specifics.

Q655 Ian Swales: On this organisational andaccountability question that the Chair started with, Ithink I am right in saying that—it is very welcomenews that we have two new tax Commissioners—sixof the 10 executive committee members are also taxCommissioners. The ones missing are the chief peopleofficer, the chief information officer and, ironically,Mr Inglese, whom we have just had in front of theCommittee. But six of the executive committee arenow Commissioners. Of those six, four are actuallyon the board of HMRC, and the rest of the board ismade up of five non-executives. The key point here,as I understand it, is that the non-executives do nothave access to what you would regard as confidentialtaxpayer information, which is the type of problemthat we have in this Committee. In other words, wehave a little circle here at three levels, which arebasically the same people, but slightly fewer at eachlevel. In terms of assuring us, how do you feel aboutthe levels of control and scrutiny of large deals, giventhat structure?Dave Hartnett: I think, Mr Swales, this is one of thethings I am rather hoping to be able to say somethingabout during this hearing. We think there is potentiallya significant role, a non-executive role, for looking atthe large settlements. What do I mean by large?Perhaps £100 million or more. We have to make thismanageable.

Q656 Chair: How many each year are the £100million or more that you would consider?Dave Hartnett: I’d have to guess, Chair.

Q657 Chair: Well, guess.Dave Hartnett: A few tens, but they are verycomplicated cases.

Q658 Chair: Okay. How many in the £50 million to£100 million range?Dave Hartnett: I am guessing again—a number ofmore tens. A higher proportion.

Q659 Chair: And how many under £10 million to£50 million?Dave Hartnett: I don’t know the answer to that. MayI write to you with the numbers?

Q660 Chair: On the issue that we raised in themeeting with you, it seems to us—the Goldman Sachsissue is £10 million; the taxpayer lost £5 million, £8million, £10 million, or whatever the figure is—anyoversight system needs to capture that.Dave Hartnett: I do not want to get into difficultyhere with either taxpayer confidentiality or with theCommittee. The figure of £10 million in relation toGoldmans is a number that has been put out in relationto interest. I would not want the Committee to think—




I am trying to be very careful here—that that numberfixes that matter in the ranges you talked about.

Q661 Chair: So what number does?Dave Hartnett: I can’t go there, for reasons oftaxpayer confidentiality.Chair: You can go there in numbers. You are notidentifying any individual.Dave Hartnett: What we are talking about is GoldmanSachs. I think the issue will be resolved if the NAOgoes ahead with their more detailed study of cases,with some tax expertise.

Q662 Chair: I am really talking about the generalhere, not the specific. On the general, it seems to methat we still have not resolved the matter. I welcomethe new Commissioners, but they are all executives;they are all guys who have worked in HMRC. Thatdoes not give you the separation that we are after, andthen there is the other thing—the oversight. We wereat £200 million when we talked to Mr Hartnett lastweek. He has come down to £100 million. Actually,there is an issue beyond that. Let us take £10 millionas the figure. That is a lot of money. We need to havesome assurance here in this Committee that there is aproper system of accountability that digs down.Sir Gus O'Donnell: We need to work on the details,but the general point is accepted. We actually needto extend the governance structure to bring in someexternal, professional input that can look at thesecases. Precisely the degree of input you need at thedifferent levels of—sometimes, it is about tax andsometimes, it is about complexity, so there is morethan one dimension to this.

Q663 Mr Bacon: Sometimes, it is about process.Sometimes, it is about observing the governance thatexists.Sir Gus O'Donnell: Indeed, in which case, you mightwant to go through a different route for the very bigones. You might want to have someone there all thetime, as you go down the track. You might want toeventually get to a point where you are doingsampling, for example, so you will want to graduateit according to your degree of concern, which isabsolutely right. I think we can manage both ofthose things.

Q664 Ian Swales: Have you got any proposals onhow you might actually achieve that? How could youhave more confidence? As we discussed in the privatemeeting, it is in the interests of HMRC to have suchan assurance, not just for the outside world, but withinyour own processes.Dave Hartnett: We completely agree.

Q665 Ian Swales: If you haven’t got any answersnow, how are you going to get to them and what sortof proposals do you think you will be making?Dave Hartnett: Let me raise seven that we areexploring. The first is something we have already putin place on the back of the National Audit OfficeReport, and that is much greater or, indeed, completeseparation between those who negotiate settlements—there are not many negotiated by Commissioners, but

some are—and those who actually approve thesettlements. We have done that already.Secondly, we want to bring much more transparencyto the process.

Q666 Ian Swales: Just to confirm, you say that youhave done that already.Dave Hartnett: We have.

Q667 Ian Swales: You have separated negotiationfrom approval.Dave Hartnett: Yes. Secondly, we want to increasetransparency by publishing our guidance around this,so that everyone knows what we expect of our people.The third possibility—it is not in our hands to dothis—is to see whether large settlements could insome way be referred to the first-tier tax tribunal.Chair: I said to you that I think that is completenonsense, because they are the ones who would sit injudgment if there is any litigation. You cannot expectthem to be judging—that is just a non-starter, MrHartnett.Dave Hartnett: Chair, what I was trying to do wascover the ground.Chair: Okay, but it is a non-starter.Dave Hartnett: The fourth is to see whether we couldhave some role like an independent assessor, orassessors, to sit alongside Commissioners in thedecision-making process. It was put to us at one stagethat maybe these individuals could be Commissioners.The difficulty with that is that the Commissioners arecharged, in the Commissioners for Revenue andCustoms Act, effectively with running the department,so the concept of a non-executive Commissionerwould require some change in law, or for the role tobe as though it were a Commissioner—so, acommissioner-like role—without actually being one.

Q668 Mr Bacon: On that point, if the situation is asyou described it, which I believe it to be, there mightbe a need for a minor change in the law. Although theCommittee does not get involved in policy matters, interms of the direction of Government policy—whetherwe spend more on roads or rail—it would be withinthe Committee’s purview to recommend that theGovernment looked at legislation if it were to tidy upthe administration of HMRC. It would be a relativelyminor adjustment, would it not?Sir Gus O'Donnell: I really want to make progress onthis. I can tell you how to slow things downdramatically and that would be to go down that route.If you are really interested in changing these thingsquickly, I would suggest trying to go down the non-legislative route.

Q669 Mr Bacon: What I am interested in doing isgetting it right. The present architecture is obviouslynot adequate. In fact, in our earlier meeting, MrHartnett said to us that it just won’t do to have taxCommissioners doing deals and then scrutinisingthem, as it were—and he accepts that—so thearchitecture is plainly not there yet. It is important thatwe have the right architecture and that the institutionsare properly staffed up with the right personnel. I am




not clear why it would delay things hugely to have asmall adjustment.Sir Gus O'Donnell: I suppose I have a bit of insideinformation here, because I was sitting in Cabinetwhen they discussed the legislative programme, so Iam very aware of the constraints on that programme.I can just imagine the discussions about preciselywhat level of priority this would have. All I amsaying is—

Q670 Mr Bacon: But you are talking about—let ussee what the relevant piece of legislation is—theCommissioners for Revenue and Customs Act 2005,which was presumably being prepared when you werepermanent secretary at the Treasury. That is right,isn’t it?Sir Gus O'Donnell: Yes—it spanned my period aspermanent secretary and then Cabinet Secretary.

Q671 Mr Bacon: This could be amended. We aretalking about a really quite small change. This couldpresumably be amended either through a Finance Actor through a small—the Treasury is shaking itscollective head.Paula Diggle: I am absolutely certain that that couldnot go in the Finance Bill, I’m sorry, Mr Bacon.

Q672 Mr Bacon: It could not go in the Finance Bill,so it would have to be done separately.Paula Diggle: Yes.

Q673 Ian Swales: To some extent, we are talkingabout what’s in a name, because I think when youlaunched this—Sir Gus O'Donnell: I want to give you an answerto this, which is effective and quick and does whatyou want.

Q674 Ian Swales: When you suggested this fourthoption, you said that it could be implemented in ashadow way, so that the person might not have legalstatus as a Commissioner but could act. It could be atwo-stage process: you could have that situation andthen, if you wanted to make the change in law, youcould do that. Does that make sense?Sir Gus O'Donnell: We did it with the shadowMonetary Policy Committee—set it up straight away,and it operated—Mr Bacon: We did it with the Comptroller andAuditor General.Sir Gus O'Donnell: Exactly. Both ways. You can dothat. All I am saying is that you do not wait forprogress and say, “Don’t worry, it will be inlegislation, we won’t do anything until then.” I amsaying, “Get on with it, you can do things now.”

Q675 Ian Swales: So that is four of the seven.Chair: And then Meg who is waiting to come in,very patiently.Dave Hartnett: The next option, which I do not thinkwill hold much attraction for the Committee but whichwe have been thinking about, is to create an externalregulator of some sort.

Q676 Chair: Yes, there is no attraction because thereis no money. Right?Dave Hartnett: So, no Oftax—

Q677 Mr Bacon: Did you say, “No tax”, MrHartnett?Dave Hartnett: Sadly, Mr Bacon, you and I have beenhere before, and no I did not say, “No tax.” Then, anincreased role for the NAO. I have not discussed thatwith Mr Morse, but the idea would be—Chair: That’s not a starter either, because thatmuddies it. It is like the tribunal—you cannot havethe tribunal or the NAO taking on a dual role. That iswhy the only options, out of the ones you have givenus, are to have external—Mr Bacon would like to callthem commissioners—bodies, people with credibilityand experience to dipstick into the cases with lowermonetary value and really look at the ones of a highermonetary value. I would take £50 million plus as ahigh monetary value.Dave Hartnett: The last one would be to see—wewould need to explore this with the National AuditOffice—whether it is possible, as part of whatever thesolution is, to put more information into our annualaccounts. We would like to see whether we can find away of picking up Mr Barclay’s point, and that is thatyou don’t know how much of that tax is at stake, howmuch we should collect and how much we actuallycollect. I think there is a case for finding a way, if wecan, of meeting that challenge.Sir Gus O'Donnell: So we do it in the aggregate, asit were, and not in individual cases.Chair: Yes, the aggregate would be brilliant, and wehave asked for that. We asked for that figure lasttime around.Sir Gus O'Donnell: And we are responding.

Q678 Meg Hillier: On the independent assessors,just to be clear, you are effectively saying that theycould be appointed by Ministers in shadow formtomorrow—more or less. Legally, would HMRC beable to let them have access to that tax information?We have heard all this issue about criminal sanctions,and it is far from free of doubt whether informationcan be revealed; but it could be if it was aministerial appointment.Dave Hartnett: There is a question of whetherMinisters are the right approach. Another approach,which builds on what Mr Swales and Mr Bacon weresaying, is that maybe these were—I cannot think of abetter badge—special non-executives of HMRC for asingle purpose, which was overseeing the largesettlements. Because they would be non-executives ofHMRC, issues of taxpayer confidentiality and the likewould be easier to manage.

Q679 Meg Hillier: So as an interim, that couldhappen. On making it statutory, I know thatindependent assessors exist, and I have worked withthem in government very effectively, but they are veryindependent. They are able to dip in where theychoose. Primary legislation is obviously an option, butI completely take the point about how long it couldtake. Do you know whether, under current law, it




could be introduced under secondary legislation, or isthat something you could write to us on?What I am trying to drive at is how quickly this couldbe done at a very independent level and whether itcould be independent of HMRC. There has been ablurring, which we have gone through—it wasrehearsed by the Committee before I was on it. Couldit be done so that assessors are independent andstatutory?Sir Gus O'Donnell: I wanted to get these issues outwith the Committee now, because I would like to beable to discuss those sorts of things. You can getsomething up in shadow form, but maybe there is aquestion of what you mean by independence.Ultimately, you might say that it has to be statutoryindependence, in which case there would obviouslybe some kind of legislation. We can think through theoptions. All I am saying is that I think we can solvewhat I regard as the real problem: getting across toyou that HMRC does this very well. I happen tobelieve that, but you need to be happy that it ishappening. We could go through the various optionsof shadow, whether it could be done in secondary andhow we would adjust primary, and all the rest of it.

Q680 Meg Hillier: I take in good faith what yousaid, Sir Gus, about having a new way to do thesedeals to make sure that money is brought in and thattaxpayers get some money from the big players. Butit is very clear from the Committee that asrepresentatives of the taxpayer, we want to see anindependent watchdog. How quickly can that bedone? Could you write to tell us? A statutoryinstrument could be introduced very quickly if it couldbe attached to the Act. That is easy and could be donerelatively quickly with political will; other thingscould take a lot longer.Sir Gus O'Donnell: The plan is that we would cometo you with proposals before the end of the year. Youwould then have a graduation—different things thatwill take different amounts of time. But I would liketo think that there will be at least one option that willgive you something fairly immediate.Dave Hartnett: Ms Hillier, may I come in? I cannotimmediately think of an enabling power in theCommissioners for Revenue and Customs Act thatwould enable this to be done through secondarylegislation. We then get back to the issue that theTreasury Officer of Accounts raised, but we willexplore it.

Q681 Mr Bacon: Who appoints HMRC non-executive directors?Dave Hartnett: HMRC, by open competition.

Q682 Mr Bacon: And who runs the competition?Dave Hartnett: A civil service commissioner, Ibelieve2.2 HMRC runs the recruitment exercise, publicising any

vacancies in the public domain and selecting on merit. CivilService Commissioners are involved in all externalrecruitment and appointment to senior roles in HMRC,although the Ministerial Code and Cabinet Office guidancemeans Commissioners do not have to be directly involved inthe appointment of NEBMs.

Q683 Mr Bacon: So the competition is separatefrom HMRC.Dave Hartnett: The competition will be chaired by acivil service commissioner with senior officers ofHMRC and, usually, someone from anotherdepartment on the panel3.

Q684 Mr Bacon: Is the Cabinet Office involved inthe appointment of non-executive directors?Sir Gus O'Donnell: Absolutely. The lead non-executive director for Government, Lord JohnBrowne, is based in the Cabinet Office. We have gonethrough a process of selecting new non-execs on thenew boards that have been set up, which are chairedby Secretaries of State across the whole ofGovernment. I cannot say this highly enough: I amreally pleased that we have been able to attract verygood non-execs who have come in to help indepartments and are proving really worth while interms of their ability to give us, sometimes,commercial input and sometimes to challengeMinisters as to whether we need another new initiativejust now.Mr Bacon: I applaud all that. As you know, LordBrowne has appeared before this Committee.Sir Gus O'Donnell: Indeed.

Q685 Mr Bacon: My specific question is aboutHMRC’s non-executive directors. Although thestructure that you are describing and the way that it isdeveloping is welcome, it seems to me that HMRCnon-executive directors must be in an almost uniqueposition in relation to non-executive directors of otherdepartments. Non-execs elsewhere probably feel thatthey have everything they need in order to scrutinisesuccessfully their departments, with possibleexceptions in security and intelligence or defence,although one hopes that those people are security-cleared.But in relation to what we have been discussing aboutconfidentiality, non-executive directors in HMRC arein the same position as pretty much everyone else.They are in the same position as members of thepublic. They get the same answers. Mr Hartnett hasconfirmed to us that this actually happens in HMRCboard meetings: the answer is given, “We can’tdiscuss that with you as a non-executive director,because it would be breaking taxpayerconfidentiality.” My question is this: aside from whatyou are talking about doing in relation to theindependent assessor or whatever we end up callingit—the shadow function that may or may not lead tostatute changes—is the structure of HMRC and itsnon-executive directors adequate to enable thosepeople to do their jobs as scrutineers?Sir Gus O'Donnell: Remember that HMRC isdifferent from, say, DCLG. When you are talkingabout DCLG and setting up a board, you have aSecretary of State chairing that board. In HMRC, you3 The recruitment process is managed by HMRC and follows

the Ministerial Code and Cabinet Office guidance for therecruitment of Non Executive Board Members. Withdelegated authority from the Secretary of State, the primarymembership of the selection panel for NEBM appointmentsin HMRC is our chief Executive and Non-ExecutiveChairman.




are talking about a non-ministerial department. Rightaway, you’re in a different world. You are right thatthe analogy is not one for one. HMRC has had adifferent structure to a standard Department led by aSecretary of State. It is not quite the same.In terms of the non-exec directors, my experience ofthe board is that they have been quite a challenginglot, to be honest, but they have not got into individualcases. They have been challenging more on overallprocesses, structures and organisation.

Q686 Mr Bacon: But what I am saying is that if theywanted to, they couldn’t. There ought not to be limitson where they can challenge. There is a structural,architectural problem, is there not?Dave Hartnett: Mr Bacon, there is another issue,which we have wrestled hard with over the years. AsI said to you before, we have the sense of a need formore oversight, and we have had for a while. Thedifficulty with non-executives and tax is that, likemany other non-executives, they have other roles aswell. Picking a non-executive who has no other role,and therefore no conflict, or potential conflict, ofinterest, could have difficulties.

Q687 Mr Bacon: That often happens. Somebody willbe the director of a bank that lends money to all kindsof corporates, and also a non-executive director ofsome other plc that is the recipient of loans from abank or vice versa. Conflicts can arise, but it is allsolved by company law and by the requirements ondirectors to observe their fiduciary duties. Why is itany different here?Dave Hartnett: We have done it the other way round.For a period of time a number of years ago, weallowed one or two of our executive directors to pickup non-executive posts. We found the conflictimpossibly difficult.

Q688 Mr Bacon: I thought you were going to saythey kept on being poached.Dave Hartnett: Impossibly difficult. That has beenone of our concerns. At one stage, three of our non-executives were immediately retired chief financeofficers, two of banks and one of a large globalmanufacturer. They were great people to have as non-executives, but we could not have talked to themabout tax—that was our view—because even thoughthe fiduciary duty was there, we needed to be able totell the world that these individuals were not seeingtax issues.

Q689 Mr Bacon: All the more reason to create aspecial architecture to—Sir Gus O'Donnell: Just on that one point, rememberthat there is—I brought it with me; a hot seller—theCabinet manual, first edition thereof. It refers in theministerial code not just to the question of conflicts ofinterest but of perceived conflicts of interest.Mr Bacon: Yes, I wanted to come to that later.Sir Gus O'Donnell: You can imagine that if you hadas a non-exec one of the people you wanted, and youjust did some of the things you mentioned casually—saying “Okay, they can recuse themselves fromthat”—there would still be some issues of perception.

Q690 Chair: Can I ask you something about thisnon-ministerial department status? After we had ourdiscussion when HMRC lost all those disks—Sir Gus O'Donnell: Two disks, of which nobody hasever lost a penny. Can we go back to that?Chair: Okay, I am not trying to rake up issues.Sir Gus O'Donnell: And who knows whether theyexisted or not? It is an interesting question.

Q691 Chair: What I wanted to ask you was this. Atthat time, Alistair Darling felt he was accountable, andhe came and explained himself to Parliament.Sir Gus O'Donnell: And, if you remember rightly, theperson in charge of HMRC at the time, Paul Gray,resigned. He knew nothing about the disks and wasnot involved with them—Chair: But the point is that the Minister wasaccountable.Sir Gus O'Donnell: He took it on his shoulders andhe resigned.Chair: The Minister felt accountable.Sir Gus O'Donnell: But the official resigned.

Q692 Ian Swales: But it is this question about a non-ministerial department being accountable toParliament. One thing to be explored is what do wemean by and how do we exercise that point aboutbeing accountable to Parliament? This is what, I think,the Chair is getting at. How that link operates inpractice also needs clarifying.Sir Gus O’Donnell: I think very much through theMinister and the Treasury—the Minister responsible.

Q693 Stephen Barclay: You referred to that in yourletter of 19 October. In fact, one of the reasons fornot disclosing to Parliament is because you also don’tdisclose to Ministers.Sir Gus O’Donnell: No, we don’t disclose individualtax matters to Ministers. That’s right.

Q694 Stephen Barclay: Why is that? SurelyMinisters are coming to information in various formsall the time? If there is a conflict of interest, youwould get another Minister to act.Sir Gus O’Donnell: No. Well, you could argue that ifyou want to go down that route, where we giveMinisters access to individuals’ tax records, but Iwould strongly oppose it.Stephen Barclay: We are not talking here aboutindividual people; we are talking about largecorporates. This is like the nonsense in this letter thattalks about the European Court of Human Rights. Weare not talking about people’s family life; we aretalking about settlements with large corporations.Sir Gus O’Donnell: What if it is an individual who isin charge of a large corporation?

Q695 Stephen Barclay: Sure, and you have thatwithin the governance. The two cases that we aretrying to get to in these hearings, which are Vodafoneand Goldman Sachs, are not dealing with individuals’family life—we are talking not about sole traders, butabout large corporations. Yet this letter sets up anumber of policy red herrings, where they could bemanaged in other ways.




Likewise, one of the other reasons you put forward isthat it has a damaging effect on other GovernmentDepartments. If a company is breaking tax law, whyis disclosing that damaging another Department?Could you give me an example of how that would bedamaging another Department?Dave Hartnett: I am just trying to think of an examplewhere disclosure could impact another Department. Itmay be, Mr Barclay, that we learned somethingthrough our inquiry.Sir Gus O’Donnell: Let me give you some examples.There have been tenders for contracts where a numberof companies are involved, and one of them may wellbe in a situation where they are in litigation.

Q696 Stephen Barclay: If an individual Minister hasa conflict, you get another Minister to deal with it.Sir Gus O’Donnell: No. I have not mentioned aMinister at all. I am saying that there is a procurementissue that a Department is dealing with—it may havegone nowhere near a Minister. It is a procurementissue, where we are talking about a tender and whereone of those companies is in a very difficult place withHMRC. There are some difficult issues for us as tohow we handle those sorts of issue.

Q697 Mr Bacon: They did try to solve that one withEDS, when I think about it. It wasn’t the prettiest. Itactually strengthens your argument. They did try togo down that route.I have to say, Sir Gus, that I completely support whatyou are saying about keeping the separation. It isabsolutely vital that we keep the separation, otherwiseyou will end up with the equivalent of PresidentNixon chasing his enemies, which he did, using theIRS. There is potentially a slippery slope, and I thinkit is very good to have clear boundaries, but there isa separate issue, which is given that that is the case,that it is a non-ministerial department, that taxCommissioners have all the authority they need tosign things off and that they are the ones who do thesigning off, rather than Ministers, there is all the moreneed to have the right structures of transparency andassurance in place. I think we are agreed—are wenot?—that those are not there to an adequate level atthe moment.Sir Gus O’Donnell: Absolutely. What we are sayingis that in the way in which these large tax cases havebeen negotiated, we have been evolving thegovernance structure. I think the structure needs toevolve a bit further to have, as Dave mentioned, whatis now in place—a separation between the negotiatorsand the people who do the oversight. In addition, ifwe can find a way through the legal issues, we shouldget ourselves someone external and professional—weprobably can’t call them a Commissioner, for variousreasons, because Commissioners have to run thedepartment, and you want to separate them fromrunning the department—who can have oversight ofthe process. Then we find a way to calibrate thedegree of oversight, depending on the size, so we arevery intensive on the very large and we go downtowards a smaller and more selective samplingprocess.

Q698 Ian Swales: Before we leave it, there is theissue of how you are accountable to Parliament, if itis a non-ministerial department. We’ve got a situationwhere you can’t talk about detailed taxpayer recordswith your own non-exec directors and you can’t talkabout them with Ministers. We have talked about theindependent assessor route, but what about theparliamentary side of it? If Parliament is directlyresponsible for your activities, how are we going toexercise that function if we have legal barriers thrownup in front of us?Dave Hartnett: One of the things that we wouldenvisage, if we have this independent assessor—letme use that badge for a moment—that that individual,or those individuals, could report to Ministers on ananonymised basis. They could report to you on ananonymised basis.

Q699 Ian Swales: As a member of the Committee.Dave Hartnett: I meant the Committee, yes. Wethought that that would be a big step forward.

Q700 Chair: Can I ask you one final thing, becauseof this odd constitutional settlement? HMRC is a non-ministerial department. If a mistake is made, as therewas in this instance, there should be a disciplinaryprocedure. You may decide at the end of the day thatyou do not want to take action and that is perfectlyfair. Up to £10 million of taxpayers’ money went, sothere should be a disciplinary procedure. Who isresponsible for that?Sir Gus O'Donnell: If a mistake is made in anydepartment—let us be honest, HMRC is dealing withmultiple cases and billions of pounds all the time, andits turnover is enormous. There will be mistakes allthe time. Dare I say it, but all of us make mistakes?None of us is perfect. That is the way of things. It isright for the department to have, within its structures,ways to look at individuals and accountability. All ofus are accountable to someone. David is accountableto Lesley Strathie, who is the chief executive ofHMRC. Lesley is accountable to me. She is one ofmy direct reports. I have a large number of directreports, as you can imagine. That is the structure. Itlooks at whether people are performing well andwhether they are operating in accordance with thecode of honesty, which is required of all civil servants.That is absolutely clear.

Q701 Chair: So in this particular instance withGoldman Sachs, where, because of Lesley Strathie’sleave, David Hartnett is fulfilling both her job andhis own job, are you undertaking a disciplinary or aninvestigation of the particular circumstances that havecaused this Committee quite a lot of concern, to seewhether any disciplinary action should be taken? Doyou see that as your job?Sir Gus O'Donnell: Can I just ask Dave to come infirst?Dave Hartnett: Sure. Again, Chair, I need to becareful, but there was a thorough review of thismistake.

Q702 Chair: Who carried that out?Dave Hartnett: The head of the large business service.




Q703 Chair: Was he one of the people—I do notknow who that is.Dave Hartnett: It was a woman, who is now retired.The learning points were identified and the error wastaken into account in someone’s annual appraisal.

Q704 Chair: In?Dave Hartnett: In someone’s annual appraisal. Itaffected their non-consolidated pay, because there wasno pay rise that year.

Q705 Mr Bacon: They didn’t get a bonus.Dave Hartnett: That is another way of putting it, MrBacon. I am not allowed to call them bonuses.

Q706 Mr Bacon: Presumably you do not have anyof these structures in place where the bonuses are paidin such a way that they do not attract nationalinsurance.Dave Hartnett: No.

Q707 Mr Bacon: But you do have a property dealwhereby your buildings are evading or avoiding tax,don’t you?Dave Hartnett: Don’t I remember the NAOdetermining that that was a very good deal for thenation?Mr Bacon: You possibly do, yes.Sir Gus O'Donnell: I can assure you that they are allpaid in cash, subject to tax and full national insurance.Mr Bacon: I thought you were going to say inbrown envelopes.Sir Gus O'Donnell: No. Fully taxable and NICable,as they say.

Q708 Mr Bacon: Mr Hartnett, there are a few thingsthat are established things between us, based on ourprevious hearings. They are a things that I think arefacts, rather than conjecture. I want to confirmwhether they are right. The first is that you invited thehead of Goldman Sachs tax in New York to come toLondon for a meeting to settle the matter of the unpaidnational insurance contributions and other matters.Dave Hartnett: Well, I was trying, as I said last time,to manage the relationship, which was broken. Otherswere leading on the settlement.

Q709 Mr Bacon: But you invited him?Dave Hartnett: I invited him.Mr Bacon: You believed—wrongly, as it turned out—that there was a legal impediment to the charging ofinterest to Goldman Sachs on the unpaid nationalinsurance contributions.Dave Hartnett: I did.

Q710 Mr Bacon: There was in fact no legalimpediment to the charging of interest as it turned out.Dave Hartnett: Yes.

Q711 Mr Bacon: Not only was there no legalimpediment, but HMRC had actually warnedGoldman Sachs, back in October 2005, that if it didn’tsettle at the same time as the other banks which hadbeen trying to run with the same national insuranceavoidance scheme but which had given up and agreed

to pay HMRC the money that it had demanded,interest would continue to pile up.Dave Hartnett: Mr Bacon, you’re asking me tocomment on a leaked document, but I want to try tobe helpful. There were 22 letters like that. That is myunderstanding. I haven’t seen them all. They carrieda calculation of interest to 31 October 2005—frommemory. If I’ve got that wrong, I’ll come back to theCommittee. Then they said that HMRC was offeringto settle without a charge to interest, and I believe thatwas because there was a legal impediment and thelegal impediment applied to all in 2005, or if it didn’tapply to all, I’m not aware of that.

Q712 Mr Bacon: Thank you; that was very helpful.It’s correct, isn’t it, that you didn’t consult lawyersabout whether or not HMRC could charge interest?Dave Hartnett: We did not consult lawyers.

Q713 Mr Bacon: And with regard to the meetingthat took place, you didn’t know whether there hadbeen a note of the meeting.Dave Hartnett: There was a note—Mr Bacon: At least not initially.Dave Hartnett: No; I can answer that question now.There was a note prepared of the meeting—in fact, byGoldman Sachs, and our people believed the note wasa fair reflection of what had taken place.

Q714 Mr Bacon: And once the mistake wasdiscovered, you were given legal advice—Mr Inglesehas basically said this—that there were a number ofoptions, one of which was to unwind the agreementthat had been reached and, indeed, to charge interestafter all, and another option was to let matters stand.That’s correct, isn’t it?Dave Hartnett: Yes.

Q715 Mr Bacon: You didn’t unwind the agreement,but you let matters stand. That’s right, isn’t it?Dave Hartnett: Yes.

Q716 Mr Bacon: Also—you said this to us lasttime—several times you met the leading QC DavidGoldberg, who was an adviser to Goldman Sachs, forlunch. That’s right, isn’t it?Dave Hartnett: I have met Mr Goldberg for lunch.I’m not sure that I was aware that he was an adviserto Goldman Sachs—Mr Bacon: Indeed. I fully accept that that’s possible.I don’t necessarily think that you’ve done anythingwrong—Dave Hartnett: Thank you.

Q717 Mr Bacon: And I’m certainly not accusing youof anything. There’s a separate question of how onefeels. I think the Chairman accused you of having had107 lunches. I only counted 94 on the schedule, butthink how it makes us feel when you’ve had that manylunches and we weren’t present at any of them. Thataside—




Dave Hartnett: May I just say one thing about thelunches? I was concerned about what I saw—probablyI was the only person in the room who saw it—somesuggestion of improper behaviour. I went back andhad a look at them all and I found three whichinvolved a taxpayer.

Q718 Mr Bacon: Right. All that was a predicate,because the point, surely, is not whether you’ve actedimproperly or not. The point is whether the impressioncould be created that you had acted improperly,regardless of whether that was a fact. Just as theministerial code is very clear that Ministers mustensure that no conflict arises, or could reasonably beperceived to arise, between public duties and privateinterests, financial or otherwise, there’s a similar,analogous sentence in the civil service code, whichsays that you “must not…accept gifts or hospitalityor receive other benefits from anyone which mightreasonably be seen to compromise” your “personaljudgement or integrity”.I am not questioning your personal judgment orintegrity—I’m just not. For what it’s worth, I thinkthat Sir Gus is correct in saying that you have done alot to bring in extra revenue. But you must surelyaccept that the pattern of all this behaviour has ledsome people to conclude—quite possibly not whollyunreasonably, if I can use a sort-of double negative—that there might be a connection. You have allowed—to take the words from the ministerial code—thepossibility of a perception to arise that there could bea conflict, even if there isn’t one. Do you accept that?Dave Hartnett: I find it a very difficult proposition,Mr Bacon. I have tried very hard indeed to ensure thatmy line manager, my colleagues and—by publishingthese engagements—people generally understand. Thething I have done most often, I think, is to meetrepresentative bodies to speak over lunch and,occasionally, to meet tax leaders of the majoraccounting firms to explore difficult issues. Lookingback, I have often done that with a colleague so thatI am not on my own. We could have explained thatmuch more fully than we have done, but that is thetruth of it.Mr Bacon: I am fully prepared to accept that ascompletely the truth. I am not really talking about thetruth; I am talking about—Dave Hartnett: We are talking about perception.

Q719 Mr Bacon: I am talking about perception. It isperfectly reasonable for people to conclude, howeverwrongly, that your pattern of behaviour, in bluntterms, looks like you have done a deal with GoldmanSachs, which was done without consulting lawyers,when you are seeing Goldman Sachs’s advisers forlunch. That is what it looks like, and people will puttwo and two together and make seven. That is whatpeople do. It is entirely possible that that is quitewrong—I am sure it is wrong—but it is notcompletely unreasonable for people. It just feels a bitodd, even though I am not for one minute suggestingthat what you have done is actually wrong. I do notthink you have done anything wrong, but do you seethe point I am making about perception?

Sir Gus O'Donnell: The fundamental flaw with thatargument is that, if you discovered that Dave wassecretly having these lunches and had not toldanybody, it is a fairly weird conspiracy when it is allpublished, and we took the initiative to publish all ofthese things. I publish all of my hospitality to a verylow level—a much lower level, I might say, than acertain other group.

Q720 Mr Bacon: You mean MPs?Sir Gus O'Donnell: Yes. It is 650, isn’t it?

Q721 Mr Bacon: Perhaps we should publisheverything.Sir Gus O'Donnell: But then you will get peoplecoming up and saying, “Aha, Mr Bacon, you hadlunch with X. Can I put forward a conspiracy theoryabout you having lunch with X?”

Q722 Mr Bacon: “And what he told me about SirGus was—“Sir Gus O'Donnell: Exactly. The ministerial code hasthe word “reasonable,” which you rightly mentionedthe first time. I think that is right.

Q723 Chair: The problem with this—I hope youwould accept this—is that David Hartnett’s position isvery different from that of other people, otherMinisters and other permanent secretaries, because thedecisions he takes are shrouded in secrecy. Do youthink it is appropriate that he has these regularlunches—not necessarily with individual taxpayers,and even I went through the list—we all know thatthe big corporates do deals either through lawyers orthrough tax advisers—but with those lawyers and taxadvisers, when he, in this secret way, is charged withgoing off and protecting the taxpayer’s interest anddoing a deal?Sir Gus O'Donnell: You have to get a particularbalance in these cases, because it is important that theperson who is doing these deals has a relationship andsorts out with them how to manage getting the billionsin. It is important, I think, that that relationship shouldbe absolutely transparent. If you have those twothings, they are the most important things. I wouldcertainly say that I would not expect Dave to be takingany lavish hospitality.Chair: Well, 107 lunches is quite a lot. What sticksin my gullet is that I have a lot of people in myconstituency who get tax credit. I probably have morewho get tax credit than many other constituencies.Every week, my surgery is full of people who come inabsolutely desperate—these are poor, poor people—because, usually, there was a mistake by HMRC orbecause they made a genuine error and didn’t give abit of information to HMRC about a change ofcircumstance. They are then lumbered with a debtwhich, if they carry on taking tax credit, is taken offthem week by week. These are poor people living onthe edge, and it feels so wrong that nobody therethinks, “We want to get the best we can out of them.




Let’s treat them humanely.” But when you are talkingabout the Vodafones or the Goldman Sachses, we havegot to have relationship, we have to come to a dealand it does not matter if £10 million goes missing. Itis a completely different set of principles, which feelsunequal in front of the law.Sir Gus O'Donnell: I think you and I probably share,although we would have to keep it quite quiet, astrong desire to help the most disadvantaged and thepoorest in society. I completely agree with you that Iwould be very much on the side of trying to sort outpolicy decisions that ensured that when we weredealing with groups that had dynamic changes to theirincome at low levels we had a better way ofmanaging that.Mr Bacon: The getting of a relationship seems to besomething that privileged groups such as GoldmanSachs and Vodafone find easier and ordinary taxpayersfind more difficult—Sir Gus O'Donnell: No. To be fair, it is very hard toget at the most disadvantaged groups, so we workvery hard with the people who represent them, citizensadvice bureaux for example, to understand thenature—

Q724 Mr Bacon: We’re talking at slightly cross-purposes. I’m talking about people who are payingtax, know that they have obligations to pay tax, andare having or trying to have a conversation withHMRC.An accountant came to visit me in my surgery theweek before last. He does the books and the tax for alot of small businesses in the east of England, and hecame to see me because in just the past six months hehad noticed a perceptible change in the pressure thatHMRC was applying to his small business clients.One of them was a company that owed £11,000 inVAT and was trying to get a time-to-pay arrangement.HMRC wouldn’t help—there were reasons for that—so in the end he just started paying £1,500 per weekbecause it was not in dispute that he owed the money.The sum of £1,500 per week settles £11,000 quitequickly, but instead of accepting that and agreeing thathe could keep it up, HMRC just levied him a fine of£1,300. He is now sacking two of his three staff inorder to meet the tax liability because he can’t doboth.I have another case—Sir Gus O'Donnell: If I could just say on that case,remember that the time-to-pay arrangements wereintroduced—the advice from HMRC to Ministerssuggested this—as a good way of helping SMEs. Ithink it’s fair to say that the programme has beentaken up dramatically.Mr Bacon: But in that particular case he wasn’t giventime to pay, while Vodafone was given five years,even though it has a lot of cash on its balance sheet.Sir Gus O'Donnell: But before that change, putforward with advice, there wouldn’t have been any ofthis, would there? There would have been a muchstricter regime before the time-to-pay arrangementscame in, which was an issue that we put forwardunder the previous Administration—the national

economic council. That was a substantial help toSMEs, and it had not existed before4.

Q725 Mr Bacon: I accept that if time to pay isavailable and is offered and agreed to, it is veryhelpful, but my point is that it is inconsistentlyapplied. If you are Vodafone you have several billionpounds of cash on your balance sheet and you’regiven five years to pay a liability, but if you’re a smallbusiness in my constituency you’re not, and you haveto lay off staff to meet your liabilities.Another case that this accountant drew to my attentionand which, having checked with his clients, he gaveme permission to mention, was of a business personwho not only was having to fight with cancer butfound, as she says in this letter: “In addition to myperiod of illness, we have had a number of clients goout of business owing us money, others who arepaying but only what they can afford and others whohave taken their work in house to try and savemoney.” That is the context in which people areoperating and, going back to my original point aboutdeveloping a relationship with HMRC, she says:“When I rang the number on the letter to ask if I couldspeak to someone to explain our situation and cometo some mutually acceptable solution, I was told thatthis was not possible.”On another case, Mr Hartnett, you know what CISis—the construction industry scheme—but there areplenty of people in PAYE who don’t. This particularindividual had paid his liabilities, and the rest of itwas to be offset through the CIS, but when eventuallythe accountant chased PAYE because he couldn’tunderstand why his client was continuing to get theseletters threatening distraint proceedings, PAYE saidthat it didn’t know what CIS was. When he talked toCIS, it said that that it didn’t know that it had to handthe information over to PAYE.These are small businesses that are under hugepressure, and they do not seem to get the same kind oftreatment. I appreciate that there is a quantum here—abell curve. There are lots of small businesses and youcan’t have the same frequency of discussion with alarge number of people, but it feels very much as ifsmall businesses are getting a much harder time of it,and big businesses are able to have a much moresensible conversation with you.Dave Hartnett: The first thing I want to say, MrBacon, is that if you want to send me the cases I willhappily have them looked at and will look at thempersonally as well. I would actually find that veryhelpful, because I was troubled by one or two thingsthat you said to me. Given that CIS actually getscollected in part through the pay-as-you-earn system,4 It is right that HHMRC tackle those who do not comply with

their tax obligations but our aim is to encourage voluntarycompliance and that means enabling our customers to fulfiltheir tax obligations as easily as possible. To that end HMRChave always given time to pay (TTP) to its customers if thatis the best way to collect the tax due. To give easier accessto a decision on TTP for Small and Medium Enterprises weset up the Business Payment Support Service (BPSS) inNovember 2008. Since then BPSS has dealt with over440,000 TTP arrangements valued at £7.7b. HMRC has notchanged its policy on TTP and has no intention of doing so.So before the BPSS was set up TTP was offered, but accessto it was made much easier after November 2008.




it is an extraordinary idea that our people did notknow. If that is right, I want to know all about it.The second thing to say is that we have a developedstrategy for small business that is one of support andguidance. I myself chaired a meeting with thesoftware industry just the other day, to see whether afree app could be developed to help the bookkeepingof small business, and I think we are going to get thereand that that will be helpful. Those cases will help meunderstand whether we have got tougher.

Q726 Chair: I hope you will take the same view ofmy poor constituents, who are having to strugglewithout tax credit.Dave Hartnett: Of course.Chair: They are as needy as a small business.Sir Gus O'Donnell: You should be really pleased that,because of the money that we are getting in throughsome of the big things that Dave has done, there isless pressure on—Chair: We don’t know how much money he has notgot in—that’s the problem.Sir Gus O'Donnell: I know that in the past, fromplaces like Switzerland, we were getting zero. We aregetting a lot more than zero, and it’s in very largenumbers, so I am delighted with that. And I intend tosay it again.

Q727 Austin Mitchell: I just want to make it clearthat, in the eyes of my constituents, I am a very hightaxpayer—a very high earner. My tax affairs are intheir usual chaos and I am available for lunches onTuesdays.Dave Hartnett: We have a board meeting everyTuesday, so I can’t help you.Austin Mitchell: Damn!Dave Hartnett told us on the 12th that, in December,there was a meeting with Mr Inglese and he said thatthere were two entirely acceptable approaches: “onewas to stay with the proposed settlement and one wasto put it to one side.” After much deep quarrying onoath, he agreed that he had not given a legal opinionas to which option you should take, but he expresseda personal view that you should not put it to one side.Why did you put it to one side?Dave Hartnett: We didn’t.Austin Mitchell: This is the interest payment.Dave Hartnett: We followed through. If I haveunderstood that correctly—I did not listen to MrInglese’s testimony—and if what you have said isright, Mr Mitchell, Mr Inglese gave two options. Ithink you just said that his personal view was thatwe should not set aside the settlement, but if I havemisunderstood, can you tell me again?Sir Gus O'Donnell: I.e., they shouldn’t reopenChair: It is what he said.

Q728 Stephen Barclay: As Austin has raised MrInglese’s evidence, can we come back to thechronology? As I understand it, Mr Inglese said thatyou first raised the error with him on 7 December, yetat our last hearing, in response to Richard, youindicated that you had told him on Monday 22November.

Dave Hartnett: I think I said several things, MrBarclay, in an attempt to be helpful. Would it behelpful if I set out the chronology?

Q729 Stephen Barclay: Yes, if you want to take usthrough it. To refresh your memory, Mr Bacon asked,“When did you speak to Mr Inglese?”, and youreplied, “I think on the Monday, but I need to check,Mr Bacon.” “You think it was the 22nd, after theFriday.” “Very soon after, yes.”Dave Hartnett: Okay. There was another passagewhen I also said perhaps it was the week later. Themeeting with Goldmans was on 19 November. Overthe weekend that followed, our banking sector leadbecame concerned that a mistake had been made ingovernance—it is really important that I stress “ingovernance.” He concluded that the matter had to gothrough our high risk corporate governance process,and discussed the matter with his director, who agreedthat that should happen. At the same time, I began tohave a nagging doubt about the interest position.

Q730 Stephen Barclay: When you say “at the sametime”, you mean over the weekend?Dave Hartnett: Over the end of that weekend.

Q731 Stephen Barclay: Was the banking sector leadat the meeting on the 19th?Dave Hartnett: Yes, he was.

Q732 Stephen Barclay: So both of you were at themeeting, but neither of you spotted the error at themeeting?Dave Hartnett: On the interest?Q733 Stephen Barclay: On the 19th.Dave Hartnett: No, not at all. In the week of the 22nd,I mentioned to Mr Inglese that I had settled—or wehad settled, or whatever the right term is—one of hislitigation cases.

Q734 Stephen Barclay: That was when, sorry?Dave Hartnett: That was in the week of 22 Novemberand I did not say more because, by then, this issue ofthe interest was going through the high risk corporateprogramme, which was our governance mechanism. Ithink it is matter of history now that the high riskcorporate programme rejected the settlement.The papers for the high risk corporate programmewere prepared by the banking sector lead and thecustomer relationship manager responsible forGoldmans, and they brought out the interest issue. Iwas abroad on business the following week. I thinkMr Bacon brought out all my movements, at the lasthearing, around this time. I was abroad on businessfor the whole week, and I was informed while I wasaway that the high risk corporate programme hadrejected the proposed settlement on adjustable optionsbecause of the interest issue.On returning to the UK, I spoke to Mr Inglese on 7December, and I asked for his advice as to what theoptions were in relation to the Goldmans interestissue, and he went on to give me the advice, as MrMitchell has described, that there were two options.Having gone back and looked it—I was trying to behelpful before.




Q735 Stephen Barclay: That is very helpful. Thereis a slight tension in what you are saying between, inthe week commencing 22nd, saying that you notifiedMr Inglese that you had settled his case, whilst at thesame time saying that by then you had also identifieda flaw in the settlement. Would it not be normal whenreferring to a litigation case with your general counsel,to say, “I have settled the case, but I’ve spotted amistake”?Dave Hartnett: I have no idea what would be normal,Mr Barclay. I mentioned it to Mr Inglese, and I wasconfident that this matter was going to be explored bythe proper governance process.

Q736 Stephen Barclay: The point I am driving at isthat you are saying you spotted the mistake over theweekend and yet the following week you are sayingto general counsel, “We’ve settled it,” but not tellinghim there is a mistake. It just seems inconsistent.Dave Hartnett: Because I wanted to be sure—as I saidto you, I had a nagging doubt. The high risk corporateprogramme board, with lawyers on it, went on toexamine that issue on, I think, 30 November.

Q737 Stephen Barclay: So there were no lawyers, Ithink we established, at the meeting on the 19th?Dave Hartnett: There were no lawyers for HMRC.

Q738 Stephen Barclay: So when the banking sectorlead and you spotted a mistake, this was a mistake—Dave Hartnett: There were different mistakes.Stephen Barclay: These were two different mistakesDave Hartnett: Yes. I have said that before.

Q739 Stephen Barclay: In terms of the file note, atboth your last two meetings you said you hadn’tactually found the time to read it. I assume youhave—Dave Hartnett: It wasn’t a question of finding thetime to read it, Mr Barclay; the issue was beingmanaged by the banking sector lead and the customerrelationship manager.Stephen Barclay: I think, actually, you did say, “No,not yet, but I will do so” and “I have not yet had achance to check”, and this was at the second hearing.Dave Hartnett: And I went and found it.

Q740 Stephen Barclay: So you have now read it. SirGus mentioned the importance of transparency. Was anote of this settlement meeting—a settlement meetingof such importance that you phoned in advance thehead of global tax at Goldman Sachs, which is a verysenior post, to fly over from New York—producedby HMRC?Dave Hartnett: I don’t think so, because—

Q741 Stephen Barclay: You “don’t think”. Haven’tyou checked?Dave Hartnett: Well, I haven’t found one, Mr Barclay.I have not searched for it; I have asked. But theimportant issue is this: what the team said to me isthat the note from Goldmans about what had takenplace came in very quickly—I’ve seen that note—andthey found it an acceptable note of what had takenplace.

Q742 Stephen Barclay: Is it reasonable to conclude,therefore—given that this is your third appearance onthe same issue before the Committee—that if youhave not to date found one, there was not a noteproduced?Dave Hartnett: I don’t think HMRC produced a noteof that meeting.

Q743 Stephen Barclay: Is it not odd, given theimportance of transparency, emphasised by Sir Gushimself, that settlement meetings attended by yourselfas a tax Commissioner are going ahead without a notebeing produced?Dave Hartnett: That is because the team thought theGoldmans note, which came in very fast, wasacceptable.

Q744 Austin Mitchell: After much correction, whichcolleagues might to comment on, you said theopposite—evidently—of what Mr Inglese told me. Itis a virtue in politics to be deaf, but it is not a virtueon this Committee. Why did you not claim theinterest? His opinion was that you could.Dave Hartnett: Mr Inglese certainly said that. Thereis in our papers a full note of the decision that wasmade. I’m afraid that I am going where you hate megoing: it is a taxpayer confidential issue. This is a verycomprehensive note that covers a number of things. Idon’t think I can go any further.

Q745 Chair: Have you seen it, Sir Gus?Sir Gus O'Donnell: No. I try to keep out of individualtaxpayer issues.

Q746 Chair: I will bring it to an end now, but it justseems that the whole saga—[Interruption.] Have youseen it?Amyas Morse: Yes.

Q747 Chair: It just seems to me that this is a bigadvert for Goldman Sachs; they toughed it out and gotlet off interest. Don’t you feel that that is true? That’swhat it feels like to me.Dave Hartnett: One of the things that is reallyimportant to HMRC—and I hope this will happen—is that the NAO will come back with tax expertise andlook at this.

Q748 Chair: You haven’t answered the question.What I am drawing this to is that the perception is thatthere has been huge reputational damage to HMRC. IfI was in Goldman Sachs, I would be rubbing myhands and thinking, “God, we beat ’em to it! We gotoff the tax bill.”Sir Gus O'Donnell: I am actually going to defend thevampire squid here. I don’t think they would regardsuch an interpretation as being at all positive fortheir reputation.Q749 Chair: What about HMRC’s reputation?Fiona Mactaggart: Don’t they want to look like thetough guys, compared with all the other banks thatfolded and had to pay interest?Sir Gus O'Donnell: No.Fiona Mactaggart: I would have thought, if I wastrying to be a hard-nosed deal banker, that that’s what




corporates are looking for. Goldman Sachs haveproved themselves to be the hardest-nosed dealbankers, because they have stuffed the Britishtaxpayer out of I don’t know how many millions ofpounds in interest.Sir Gus O'Donnell: I think that there were somepeople some time ago who thought that that was asensible place for financial services companies to be.When you heard Bob Diamond’s lecture, as opposedto his earlier evidence, you began to see people in thefinancial sector realising that “Yah-boo, we got oneover on the taxman” is actually massively bad for theirreputation, and not good. Goldmans would think that,as well.

Q750 Chair: Do you accept there’s reputationaldamage to HMRC?Dave Hartnett: There is reputational damage toHMRC by what has been written in many quartersabout this. I also think that, because of the informationthat has been leaked out of our organisation and goneout there, the story is seriously incomplete.

Written evidence from the Permanent Secretary for Tax, HMRC

In the Select Committee hearings on the 12 and 17 of October, I agreed to provide a letter setting outHMRC’s legal view in relation to the disclosure of taxpayer confidential information to a ParliamentaryCommittee.

The relevant legislation is contained in the Commissioners for Revenue and Customs Act 2005 (c 11), whichso far as relevant, provides as follows:

18 Confidentiality

(1) Revenue and Customs officials may not disclose information which is held by the Revenue andCustoms in connection with a function of the Revenue and Customs.

(2) But subsection (1) does not apply to a disclosure-

(a) which-

(i) is made for the purposes of a function of the Revenue and Customs, and

(ii) does not contravene any restriction imposed by the Commissioners,

(b) which is made in accordance with section 20 or 21,

(c) which is made for the purposes of civil proceedings (whether or not within the United Kingdom)relating to a matter in respect of which the Revenue and Customs have functions,

(d) which is made for the purposes of a criminal investigation or criminal proceedings (whether ornot within the United Kingdom) relating to a matter in respect of which the Revenue and Customshave functions,

(e) which is made in pursuance of an order of a court,

(f) which is made to Her Majesty’s Inspectors of Constabulary, the Scottish inspectors or the NorthernIreland inspectors for the purpose of an inspection by virtue of section 27,

(g) which is made to the Independent Police Complaints Commission, or a person acting on itsbehalf, for the purpose of the exercise of a function by virtue of section 28, or

(h) which is made with the consent of each person to whom the information relates.

(3) Subsection (1) is SUbject to any other enactment permitting disclosure.

(4) In this section-

(a) a reference to Revenue and Customs officials is a reference to any person

who is or was-

(i) a Commissioner,

(ii) an officer of Revenue and Customs,

(iii) a person acting on behalf of the Commissioners or an officer of Revenue and Customs,

or

(iv) a member of a committee established by the Commissioners,

Chair: That is why we want better accountability.Dave Hartnett: And that is why we welcome theNAO looking at this.

Q751 Chair: Finally, given the sort of coverage therehas been over the Goldman Sachs deal and over theVodafone deal, which we touched on this afternoon,have you considered your own position? Have youconsidered resigning, or do you feel that you still havethe confidence of Parliament?Dave Hartnett: I have thought very hard about boththose issues. I have read just about everything that hasbeen written about them. It is incomplete. I have workto do and I have no plans to resign.Chair: Thank you.Sir Gus O'Donnell: It needs to be put on the recordyet again that whatever the circumstances of this case,I am extremely grateful to Dave for the work that hehas done, particularly with regard to Switzerland andLiechtenstein, which will bring in billions of poundsfor the taxpayer that we would not otherwise have got.Chair: Thank you.



(c) a reference to a function ofthe Revenue and Customs is a reference to a function of-

(i) the Commissioners, or

(ii) an officer of Revenue and Customs,

19 Wrongful disclosure

(1) A person commits an offence if he contravenes section 18(1) or 20(9) by disclosing revenue andcustoms information relating to a person whose identity-

(a) is specified in the disclosure, or

(b) can be deduced from it.

(2) In subsection (1) “revenue and customs information relating to a person” means information about,acquired as a result of, or held in connection with the exercise of a function of the Revenue and Customs(within the meaning given by section 18(4)(c)) in respect of the person; but it does not include informationabout internal administrative arrangements of Her Majesty’s Revenue and Customs (whether relating toCommissioners, officers or others).

(3) It is a defence for a person charged with an offence under this section of disclosing information toprove that he reasonably believed- (a) that the disclosure was lawful, or

(b) that the information had already and lawfully been made available to the public.

(4) A person guilty of an offence under this section shall be liable-

(a) on conviction on indictment, to imprisonment for a term not exceeding two years, to a fine

or to both, or

(b) on summary conviction, to imprisonment for a term not exceeding 12 months, to a fine notexceeding the statutory maximum or to both.

Five general features of this regime are to be noted.

First, the legislation provides a strong regime for ensuring the confidentiality of information in HMRC’shands—particularly where the information in question relates to an identifiable person’s tax affairs. Section18(1) prohibits the disclosure of information. It applies to HMRC Commissioners and officials, and toinformation held by HMRC in connection with a function of HMRC. Where the information disclosed isinformation relating to a person (including a company) whose identity is specified in the disclosure, or can bededuced from it, the prohibition on disclosure is backed by criminal sanctions. The criminal offence is set outin section 19 of the Act, and is subject to a defence of reasonable belief, which is for the official concerned toprove, that the disclosure was lawful, or that the information had already and lawfully been made available tothe public. The existence of the criminal sanction justifies a properly cautious approach to requests fordisclosure of information that might fall within the scope of the sanction. It is important to note that, althoughit is a defence to the criminal offence that the information was already lawfully in the public domain, this doesnot make a disclosure by HMRC lawful for the purposes of section 18(1).

Secondly, that section 18(1) prohibition is disapplied only in the situations specified in section 18(2). Theeffect of the disapplication is that the prohibition no longer applies.

Thirdly, there is no provision in the 2005 Act to prevent onward disclosure once it has been disclosed byHMRC. However, some bodies to which HMRC discloses information are themselves subject to legislativeregimes controlling the extent of permissible onward disclosure by them. The National Audit Office is anexample of such a body. The Committee of course is not such a body.

Fourthly, where a disclosure is not prohibited under section 18 (because it would be covered by one of thesituations in section 18(2)) the effect of that is not to require disclosure. It is rather to require the Commissioneror official to make a decision as to whether or not it would be appropriate in the particular circumstances todisclose the information sought. The effect is thus to trigger a power, rather than an obligation, to disclose.This regime stands in contrast to the position where an obligation to disclose is imposed by an express statutoryrequirement. By way of relevant example, there is an obligation to disclose to the National Audit Office as theComptroller and Auditor General has a right of access to all documents, information and explanation herequires to carry out his examinations under the National Audit Act 1983 (c 44).

Fifthly, in exercising the power (and making the decision as to whether or not it would be appropriate todisclose the information), the decision maker is bound to act consistently with both public law principles andother statutory obligations. The latter include the right to confidentiality enjoyed by both individuals andcompanies under article 8 of the European Convention of Human Rights, and the protection of individual dataunder the Data Protection Act 1988 (c 29). The former requires the decision maker to take into account allrelevant considerations and to disregard irrelevant considerations, to apply fair process, and to reach (insummary) a reasonable decision. Where there is a power to disclose, a decision whether or not to disclose mustbe taken in respect of each identifiable piece of information, or identifiable category of information in whichall pieces of information have similar characteristics.

The first issue that arises in the present context is whether disclosure of identifiable taxpayer informationwould, or might, be prohibited from disclosure. As noted above, that is an issue that arises in a particularlyanxious context because of the possibility that disclosure might amount to a criminal offence.



There is no express power in the legislation to make disclosures to Parliament. The question is thereforewhether disclosure would fall within the exception in section 18(2)(a), which permits disclosure for the purposeof HMRC’s functions.

HMRC recognises that it is part of its functions properly to assist Parliament. On that basis, HMRC hasconsistently taken the view that it is lawful to pass non-identifying information to Select Committees throughthis gateway. However, it does not follow from this that it is necessarily properly part of HMRC’s functions toprovide disclosure of taxpayer specific information to a Select Committee. The question whether it would beso is far from free of doubt—and we emphasise again the potentially criminal context in which that questionarises. It is far from free of doubt because for example (a) taxpayer specific information is of a different andmuch more sensitive character from non-identifying information, engaging different statutory duties (such asthose arising out of the ECHR); (b) our assessment to date has been that, if taxpayers believe that theirinformation may be disclosed, it will make it very much more difficult for us to collect tax—thus having apositively detrimental effect upon the functions identified specifically in section 5 of the Act.

The second issue assumes that there is no prohibition on disclosure and asks whether, as a matter of properlyand lawfully exercised discretion, disclosure of the information sought (ie sensitive taxpayer specificinformation) should be made. That issue has some, perhaps many, features which overlap with the first issue.But it is convenient to consider it separately because it engages a wider range of considerations than thenarrower “functions” question.

The broad factors that are to be taken into account have been the Subject in the past of the most carefulconsideration by HMRC. In 2009 Edward Leigh MP wrote to Gus O’Donnell in relation to HMRC’s positionon taxpayer confidentiality. Advice was taken from First Treasury Counsel, and there followed a discussion inthe Executive Committee (Excom) as to the appropriate course to take. A decision was taken to maintain theconfidentiality of information which identifies and relates to specific taxpayers in responding to questions fromthe Committee. Excom took into account the following particular policy and operational considerations: Firstthe damaging effect on voluntary compliance by taxpayers which would follow inevitably from any relaxationin our approach to taxpayer confidentiality. Any disclosure would undermine the open and transparent basis onwhich we seek to work with taxpayers, as the most effective and efficient way to collect tax, leading to areduction in revenues collected without intervention and to additional costs for HMRC and taxpayers. Secondlythe damaging effect on Ministers, who by long tradition remain at arm’s length from taxpayer specificinformation, in order to protect them from allegations of impropriety or political interference. Thirdly, thedamaging effect on our relationship with other Government Departments and agencies. Successive Ministershave insisted that information may only be disclosed through express gateways in legislation, often againststrong opposition, and any change in our stance risks undermining our ability to insist on such express legalgateways. Fourthly, the damaging effect on our reputation for impartiality in the handling of individual cases.And last, the fact that it would be inappropriate and unfair to create anyreal risk of exposing officials tocriminal sanction in the course of their duties.

Specifically in the context of disclosure to the Committee, it is also relevant to note the following:

— HMRC is already subject to detailed oversight and scrutiny in the public interest by the NationalAudit Office. That body has the power (Which it has exercised) to call for any informationincluding confidential information relating to an individual taxpayer’s affairs. HMRC providessuch information. There is thus no question of the clear and acknowledged public interest ineffective oversight of HMRC’s affairs not being fully met.

— HMRC provides this information on a confidential basis; and in the knowledge that there is atailored legislative regime binding the National Audit Office to protect the confidentiality of theinformation in its hands subject to express statutory gateways governing onward disclosure by it.That is a feature of the regime which is of obvious importance because if effectively removes therisk of criminal liability and removes the risk of a disclosure being unlawful as a matter of civil law.

19 October 2011

Further written evidence from the Permanent Secretary for Tax, HM Revenue and Customs

Information Requested At Pac Hearing, 12 October 2011: HM Revenue and Customs Accounts2010–11

Please find attached the consolidated responses we promised to provide you at the hearing on 12 October2011.

If you require any further information please do not hesitate to contact me.

21 October 2011

Q43–46 (Austin Mitchell): An estimate of how much tax was 'given away' in the Goldman Sachs settlement?

Taxpayer confidentiality prevents us supplying a note as requested.



Q161·163 (Stephen Barclay): Was written advice sought in all four of the cases (mentioned in theNAOreport), prior to any acceptance being communicated to the companies?

In the resolution of tax disputes, the team dealing with a case involves lawyers and other specialists atdifferent stages, as they consider appropriate. We do not comment in any detail on legal advice sought or givenin a case.

Further written evidence from the Permanent Secretary for Tax, HM Revenue and Customs

I thought it would be helpful, in the light of the discussions we have been having with the Committee, toprovide more information about HMRC's current governance framework for resolving tax disputes and brieflyto outline some additional changes we are considering.

HMRC first published its Litigation and Settlement Strategy (the LSS) in 2007 and in July this year publishedan updated version. There has been no change in the principles underpinning the Strategy, however. All disputesmust be resolved in accordance with the law; HMRC does not "split the difference" with the taxpayer or enterinto "package deals" in which one issue is traded off against another.

In many cases, HMRC believes there is one clear answer as to how tax law applies to an issue in dispute:in those cases, if the taxpayer is not willing to concede the point in full, HMRC will litigate the case. In othercases, because the application of tax law to a particular set of complex circumstances is not straightforward,there may be more than one possible answer as to how the issue in dispute should be resolved. The LSSrecognises that possibility but makes clear that any resolution of the issue must be consistent with the law andrepresent an outcome that we would expect from litigation. Similarly, the LSS make clear that if, in the lightof the facts of the case, HMRC does not have strong arguments on an issue in dispute, we should concedethe point.

Governance of Tax Disputes

To underpin this strategy, we have developed governance processes which capture all our major cases. Theseprocesses are set out in our guidance. Our arrangements are already audited by our Internal Audit function.Their reports are considered by the Audit and Risk Committee of the HMRC Board. The Audit and RiskCommittee is chaired by a non-executive member of the Board and all other members are non-executives. TheNational Audit Office has full access to all our papers and also attends all its meetings.

The vast majority of cases worked across HMRC where there is a difference of view with the taxpayer canbe worked within the framework of our guidance because they do not raise novel or complex issues. Linemanagers are responsible for assuring the quality of the work that is done. For cases that do raise novel orcomplex issues, or where there are significant amounts of tax at stake, the lead case worker will bring in therelevant technical specialists (and legal advisers where necessary). The LSS states that HMRC's stance on anissue should be agreed between all the relevant parties. Where consensus cannot be reached, the issue shouldbe escalated up the line management chain for agreement.

For our largest cases, chiefly our large business cases, there are specific governance arrangements to ensurethat senior officials sign off proposals for resolving the issues in dispute. The High Risk Corporates Programme(HRCP) comprises a small number of specific high value cases in which a number of issues are in dispute witha business, typically where debate has been continuing for some time. The Programme represents a commitmenton both sides to resolving those issues to an agreed timetable. Decisions on the cases in the Programme aretaken by the Programme Board, which comprises Directors from a range of business areas, including theSolicitor's Office. In the rare event where the Board cannot reach consensus, the matter is escalated to theHMRC Commissioners.

The Managing Complex Risk Programme is a similar programme of work to manage cases of slightly lowervalue outside the Large Business Service.

The HRCP Board also has another role in our governance processes. For any large business case where thetotal tax under consideration exceeds £100 million, or which is particularly sensitive, proposals for resolution,whether by agreement or through litigation, must be signed off by the HRCP Board. For cases where the taxunder consideration exceeds £250 million or the issues are exceptionally sensitive, the HRCP Board makes arecommendation to the HMRC Commissioners, who must agree the proposals for resolution. In a very smallnumber of cases, different governance arrangements were agreed in the past, for reasons specific to theparticular case, but we will not do that going forward.

One further aspect of our governance arrangements is worth noting. HMRC has arrangements in place toagree how it is prepared to resolve specific issues where the same point arises in several cases. Typically, thishappens where an avoidance scheme has been used but the issue could also be a technical one. Through theCounter Avoidance Group and other panels, the relevant HMRC business areas agree the basis on which anissue may be resolved, setting a framework within which individual cases are worked, including those inHRCP. This is to ensure consistent outcomes for the same issue across different taxpayers.



The National Audit Office View

The arrangements set out above have been described by the National Audit Office (NAO) as providing"strong" governance in ensuring effective and consistent implementation of the Litigation and SettlementStrategy (LSS). The NAO also recommended some improvements, designed in particular to ensure clearseparation between the analysis and negotiation phase of resolving a dispute and the approval of the proposedsettlement. We have already adopted the NAO's recommendations.

Further improvements

We have listened to the points made to us by the Committee and we are considering what more we mightdo to ensure greater transparency about how decisions are taken and to improve accountability to Parliament,without compromising the fundamental principles of taxpayer confidentiality or HMRC's independence fromthe political process when it comes to decision-making in individual cases.

I have described above the LSS framework within which we work. To build on that, we are considering thefollowing proposals:

— Updating and improving the visibility of our governance arrangements in this area, incorporatingthe improvements recommended by the NAO.

— Supporting the NAO in their further work to examine the reasonableness of some of the settlementsin larger cases, which could act as a pilot for incorporating a test of a sample of cases into theregular pattern of NAO audits.

— Giving a clearer aggregate picture in our Annual Report and Accounts of the additional revenuesecured through our process for resolving disputes.

— Bringing in additional non-executives with significant tax experience to have a role in reviewingand assuring significant settlements. Hitherto, the role of our non-executives has been to challengeand assure the Department's strategies and management, rather than to assure specific tax decisions.

We will be happy to discuss these ideas with the Committee on Monday. They will require a good deal morework and consultation, which we aim to do before the end of the year. We will, of course, keep you informedof progress.

Finally, you wanted some background material on the role of HMRC's Commissioners as set out inlegislation. I have attached the relevant sections of the Commissioners for Revenue and Customs Act 2005 inan Annex. We would be happy to provide more detail if you wish.

4 November 2011

Annex

COMMISSIONERS FOR REVENUE AND CUSTOMS ACT 2005

Section 1

The Commissioners

(1) Her Majesty may by Letters Patent appoint Commissioners for Her Majesty's Revenue and Customs.

(2) The Welsh title of the Commissioners shall be Comisynwyr Cyllid a Thollau Ei Mawrhydi.

(3) A Commissioner:

(a) may resign by notice in writing to the Treasury, and

(b) otherwise, shall hold office in accordance with the terms and conditions of his appointment (whichmay include provision for dismissal).

(4) In exercising their functions, the Commissioners act on behalf of the Crown.

(5) Service as a Commissioner is service in the civil service of the State.

Section 5

Commissioners' initial functions

(1) The Commissioners shall be responsible for:

(a) the collection and management of revenue for which the Commissioners of Inland Revenue wereresponsible before the commencement of this section,

(b) the collection and management of revenue for which the Commissioners of Customs and Excise wereresponsible before the commencement of this section, and

(c ) the payment and management of tax credits for which the Commissioners of Inland Revenue wereresponsible before the commencement of this section.



(2) The Commissioners shall also have all the other functions which before the commencement of thissection vested in:

(a) the Commissioners of Inland Revenue (or in a Commissioner), or

(b) the Commissioners of Customs and Excise (or in a Commissioner).

(3) This section is subject to section 35.

(4) In this Act "revenue" includes taxes, duties and national insurance contributions.

Section 9

Ancillary powers

(1) The Commissioners may do anything which they think:

(a) necessary or expedient in connection with the exercise of their functions, or

(b) incidental or conducive to the exercise of their functions.

(2) This section is subject to section 35.

Section 11

Treasury directions

In the exercise of their functions the Commissioners shall comply with any directions of a general naturegiven to them by the Treasury.

Section 12

Commissioners' arrangements

(1) The Commissioners shall make arrangements for:

(a) the conduct of their proceedings, and

(b) the conduct of the proceedings of any committee established by them.

(2) Arrangements under subsection (1) may, in particular:

(a) make provision for a quorum at meetings;

(b) provide that a function of the Commissioners:

(i) may be exercised by two Commissioners, or

(ii) may be exercised by a specified number of Commissioners (greater than two).

(3) A decision to make arrangements under subsection (1) must be taken with the agreement of more thanhalf of the Commissioners holding office at the time.

(Section 35 of the Act referred to above makes provision for the functions of the Revenue and CustomsProsecution Office.)

Further written evidence from the Permanent Secretary for Tax, HMRC

Information Requested at PAC Hearing, 7 November 2011: HM Revenue and Customs Accounts2010–11

Please find attached the consolidated responses we promised to provide you at the hearing on 7 November2011.

I would also like to take the opportunity to clarify what “tax under consideration” is, since figures have beenquoted at the hearing, and in the media, as referring to some £25 billion of tax “outstanding” or “at stake”,when neither are actually correct.

Tax under consideration is initially an estimate of a maximum potential additional tax liability before a fullinvestigation of the specific facts has taken place, and analysis of relevant law, and before applying any reliefsor allowances. It is not actual tax either owed or unpaid. In many cases, when HMRC has looked at the fullfacts it becomes clear that there is no further liability at all. Our experience is that when we look across allrelevant issues under enquiry, only around half of the estimate of tax under consideration is tax actuallychargeable.

The £25 billion figure quoted is not an annual figure. It is a snapshot as at a particular date, includingenquiries which may have been open for several years.

We use tax under consideration as a tool to help us to direct resources where we think there is the mostpotential tax at risk, so that we do not focus our efforts on unproductive small issues. This approach has proved



highly successful, as evidenced by the progressive rise in the Large Business Service’s compliance yieldsince 2005–06.

I hope this explanation is helpful, and If you require any further information please do not hesitate tocontact me.

23 November 2011

Q383—Margaret Hodge

Can you also tell me whether it is true that in April 2010 there was a judgement in the British Virgin Islandsin which the judge dismissed a claim that the employer of the bankers—Goldman Sachs—was in the VirginIslands?

It is assumed that this question relates to the preliminary hearing in the First-tier Tribunal in December 2009before Judge Williams which was held to determine whether Goldman Sachs International (GSI) was the “hostemployer” of the relevant employees, or whether this was Goldman Sachs Services Limited (GSSL), a companyregistered in the British Virgin Islands. The “host employer” would be liable to pay any NICs that might bepayable. In April 2010 Judge Williams found that GSI was the host employer of the relevant employees andnot GSSL, the British Virgin Islands company. This supported the HMRC position. Goldman Sachs appealedthis preliminary decision to the Upper Tribunal and the hearing was due to take place in May 2011. When thesettlement between HMRC and Goldman Sachs was reached, a consent order was signed and submitted to theCounty Court and the tax tribunal proceedings were withdrawn by agreement of the parties.

Q392—Margaret Hodge

Could you help the Committee by telling us what the claim was and what the settlement sum was (in theGoldman Sachs case)

The amount claimed in the County Court claim form was £30,816,382. We cannot comment on thesettlement sum.

Q435–439—Ian Swales/Margaret Hodge

How many large settlements have there been of over £100 million, between £50 million and £100 million andbetween £10 million and £50 million?

TOTAL NUMBER OF LARGE SETTLEMENTS

2008–09 2009–10 2010–11

More than £100m 10 19 7More than £50m to £100m 13 22 19£10m to £50m 107 118 120

— These figures include “Fleming” cases. These are claims for under-declared or overpaid VAT,potentially going back as far as the inception of VAT in 1973. They followed the House of Lordsjudgements in January 2008 in the cases of Fleming and Conde Nast which concerned the waythat the three year time limit on making claims had been introduced.In Revenue and Customs Brief 07–08, published on 20 February 2008, claims were invited inrespect of overpaid output tax for accounting periods ending before 1 May 1997.Subsequent legislation in the 2008 Finance Act limited the scope for making claims for theseaccounting periods by introducing a new transitional period ending 1 April 2009, before whichany such claims had to be made.

— For historical reasons, there are differences in the management information recorded between theLarge Business Service (LBS) and Local Compliance (LC). Although these tables representnumbers of settlements, the LBS figures refer to the settlement of individual issues and the LCfigures to the settlement of cases.

Written evidence from Osita Mba LLB (Hons), BCL (Oxon)

RE: PUBLIC INTEREST DISCLOSURE ACT 1998

HM REVENUE & CUSTOMS’ PROCEDURES FOR SETTLING TAX DISPUTES

1. I respectfully present my compliments to you and humbly request that consideration be given to thispublic interest disclosure (further my letters dated 7 March 2011 and 23 May 2011) which tends to show that:

(a) HMRC’s Permanent Secretary for Tax settled the Goldman Sachs case unlawfully yet HMRC’sGeneral Counsel and Solicitor approved it (see paragraphs 2.1 to 2.44 of the enclosedmemorandum, particularly paragraph 2.36).

(b) The Comptroller and Auditor General of the National Audit Office ignored and/or concealed



failure(s) to comply with legal obligation(s) in relation to the Goldman Sachs settlement which Ireported to him (see paragraphs 2.57 to 2.64 of the memorandum) and in relation to othersettlements, including the Vodafone case (see paragraphs 3.1 to 3.32), in his recent review ofHMRC’s procedures for settling tax disputes.

(c) The Permanent Secretary for Tax misled Parliament on the nature and/or scope of HMRC’s powerto withhold information for reasons of taxpayer confidentiality (with the apparent acquiescence ofhis fellow Commissioners, the General Counsel and Solicitor, the Comptroller and Auditor Generalof the National Audit Office, and the Cabinet Secretary) ostensibly to conceal the afore-mentionedfailure(s) (see paragraphs 4.1 to 4.47 of the memorandum—particularly paragraphs 4.24 and4.26—and the enclosed paper).

2. As I explained previously, I worked in the Personal Tax Litigation team of HMRC Solicitor’s Office,which dealt with the Goldman Sachs litigation, from February 2007 until November last year. I was thentransferred to the Criminal and Information Law Advisory team, which advise the Commissioners and otherpolicy clients on the confidentiality and disclosure provisions in the Commissioners for Revenue and CustomsAct 2005 (CRCA 2005), including submissions and evidence to Select Committees of the House of Commonsand responses to Parliamentary Questions

3. I enclose herewith for your consideration the following two documents referred to in paragraph 1 above:

(i) Memorandum on HMRC’s Procedures for Settling Tax Disputes; and

(ii) Paper titled “The Rules of Official Secrecy and Taxpayer Confidentiality and the Public InterestExceptions for Official Accountability and Taxpayer Confidence in the Tax System: a HistoricalPerspective”.

Executive Summary

4. These comments by the Treasury Committee (Administration and effectiveness of HM Revenue andCustoms Sixteenth Report of Session 2010–12 HC 731) provide a good background to this matter:

“159. A particular source of controversy has been HMRC’s settlement of large tax cases involvingcorporations. Allegations have been made in the press that cases have been settled inappropriatelyfor a lower yield than might have otherwise been achieved. We pressed HMRC witnesses and theMinister 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 achievea settlement with Vodafone and argued that figures cited in the press lacked credibility. HMRC saidthey were unable to comment in relation to another high-profile case for reasons of taxpayerconfidentiality…

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 sumsinvolved in some of these cases are enormous. …

161. The National Audit Office has undertaken work on HMRC’s procedures for resolving large taxcases, whilst the Committee of Public Accounts has already recommended that “the Departmentshould consider the scope for increasing transparency in the area of large and complex tax cases andfor assuring Parliament and the public that due process in the resolution of these cases is beingfollowed.”

162. The Exchequer Secretary did not believe it would be appropriate for politicians to be involvedin settling individual tax cases. However, he was concerned that the current process did not allowHMRC to respond to allegations against it:

“We have to remember that some of these allegations question the integrity of dedicated publicservants on the basis of little or no evidence, and it concerns me that some of these decisionsare becoming politicised and it is quite difficult for HMRC to answer back because they are notentitled to put confidential information into the public domain.”

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

5. It is inaccurate and misleading to assert that rules of confidentiality prohibit HMRC from discharging itsduties of transparency and accountability to Parliament and the public. Section 18(1) of CRCA 2005 enacts thegeneral duty of confidentiality in these terms: “Revenue and Customs officials may not disclose informationwhich is held by the Revenue and Customs in connection with a function of the Revenue and Customs.”However, this duty is subject to numerous exceptions provided in subsections (2) and (3) of section 18.

6. One of these exceptions is section 18(2)(a) which provides that the duty of confidentiality under section18(1) “does not apply to a disclosure which is made for the purposes of a function of the Revenue and Customs,and does not contravene any restriction imposed by the Commissioners.” Section 51(2) defines “function” for



these purposes as “any power or duty (including a power or duty that is ancillary to another power or duty”,while section 9 authorises the Commissioners to “do anything which they think necessary or expedient inconnection with the exercise of their functions, or incidental or conducive to the exercise of their functions”.

7. HMRC routinely issues press releases (also published on its own website) disclosing sensitive personaldetails of individuals convicted of (and sometimes charged with) tax and benefit offences. A recent pressrelease issued shortly after the evidence by the Exchequer Secretary to the Treasury Sub Committee (referredto in paragraph 4 above) is as follows:

Disability tax credits cheat jailed—23 May 2011

A mother who faked her children’s disabilities to steal £112,000 in tax credits which she spent ontickets to see boy bands and stars of the X Factor was jailed for two years today.

Jayne McKnight, 45, from Wolverhampton, began claiming tax credits in 2003, stating that one ofher four children was severely disabled. During the course of the fraud she increased this to threeseverely disabled children, and added a severely disabled and unemployed husband, whilst claimingshe was working part-time for a temping agency. At the same time, McKnight claimed thousands ofpounds in childcare and after-school club costs.

HM Revenue & Customs (HMRC) investigators uncovered neither her children nor her husband weredisabled. Mr McKnight was in fact employed by a local newspaper, and the temping agency whereJayne McKnight claimed to be employed had never heard of her. Finally, she had never evencontacted any of the childcare providers she claimed tax credits for, and her children had neverattended any after-school clubs.

David Gauke, Exchequer Secretary to the Treasury, said:

“The Government will not tolerate dishonest people stealing public money which pays for vitalservices. Those who think they can cheat the benefits system should think again. The extra £900million we have invested in HMRC allows them to step up the fight against benefit cheats andtax fraudsters.”

Notes to editors1. Defendant’s details:* Jayne McKnight, DOB 9/2/1966, of 107 Owen Road, Wolverhampton, pleaded guilty to beingknowingly concerned in fraudulent activity with a view to obtaining payments of Tax Creditscontrary to Section 35 of the Tax Credit Act 2002.2. Sentencing took place at Wolverhampton Crown Court.

8. It should be noted that the general duty of confidentiality under section 18(1) of CRCA 2005 applies toany information held by HMRC in connection with any of its function, including information that may be inthe public domain already. As the availability of information in the public domain is not an exception to theduty of confidentiality a specific gateway is required to issue these press releases lawfully. HMRC appliessection 18(2)(a) which permits a disclosure made for the purposes of its function. The Commissioners considerthat the duties of transparency and accountability HMRC owes to the general body of taxpayers override anyduty of confidentiality it owes to the individual customers concerned; and that in these circumstances suchdisclosures constitute a lawful interference with the rights of the affected customers to private and family lifeunder Human Rights legislation.

9. The Commissioners are well aware that section 18(2)(a) of CRCA 2005 similarly authorises the disclosureof information about corporate customers involved in controversial settlements to Select Committees of theHouse of Commons that have oversight functions over the Department, such as the Committee of PublicAccounts and the Treasury Committee. As the recent controversy surrounding the Vodafone and GoldmanSachs settlements shows, such disclosures are clearly necessary in order to assure Parliament and the publicthat cases involving large sums of money are being settled appropriately.

10. However, the Permanent Secretary for Tax, Mr Hartnett, who has the effective delegated authority toexercise the Commissioners’ power to forego the collection of tax for reasons of good management and alsohas the sole delegated authority to exercise the Commissioners’ power to withhold information for reasons oftaxpayer confidentiality (including information relating to settlements he has been involved in) has effectivelyensured that relevant information about these settlements are withheld from Parliament and the public.

11. As a result, Parliament and the public appear to have been deliberately misled in the following evidenceand submissions:

(a) Oral evidence to the Committee of Public Accounts on 28 January 2008.

(b) Oral evidence to the Committee of Public Accounts on 28 January 2009.

(c) Oral evidence to the Committee of Public Accounts on 9 March 2009.

(d) Reply to the letter of 25 March 2009 by the Chairman of the Committee of Public Accounts, MrEdward Leigh MP, to the Cabinet Secretary, Sir Gus O’Donnell.

(e) Oral evidence to the Committee of Public Accounts on 16 November 2010 relating to theVodafone settlement.



(f) Oral evidence to the Treasury Sub-Committee on 16 March 2011 relating to the Vodafonesettlement.

(g) Oral evidence to the Treasury Sub-Committee on 11 May 2011 relating to the Goldman Sachssettlement.

(h) Written evidence to the Treasury Sub-Committee dated 15 June 2011 relating to the GoldmanSachs settlement.

(i) Oral evidence to the Treasury Sub-Committee on 12 September 2011 relating to the GoldmanSachs and the Vodafone settlements.

12. Select Committees of the House of Commons have unqualified powers to send for “persons, papersand records” relating to their field of enquiry, and a witness issued with such an order is bound toprovide all information and documents requested by a Select Committee even where there would be anexcuse in a court of law. The issue of an order for an individual to attend or to provide evidence canexercise these powers formally. However, in line with certain long-standing conventions on the provisionof information which have been observed in practice by successive administrations on grounds of publicpolicy, the Committee of Public Accounts and the Treasury Committee have hitherto requested HMRCofficials to give evidence to them by means of an informal invitation. Clearly, this concession is based onthe understanding that HMRC’s witnesses will be as open as possible with the Committees, refusing toprovide information only when disclosure would not be in the public interest, which should be decidedin accordance with relevant statute.

13. It is apparent from the enclosed memorandum and paper that senior officials of HMRC haveconsistently breached this understanding in the past few years, despite repeated recommendations by theCommittee of Public Accounts and the Treasury Committee. In these circumstances, it will beappropriate for the Committees to invoke their formal powers to send for “persons, papers and records”relevant to HMRC’s settlement of these controversial cases in order to deal conclusively with concernsthat some of these cases have been settled inappropriately for a lower yield than might have otherwisebeen achieved.

14. In thanking you in advance for your assistance in this matter, I avail myself of this opportunity to renewthe assurance of my highest consideration.

6 October 2011

Further written evidence from Osita MBA

IN THE MATTER OF THE PUBLIC INTEREST DISCLOSURE ACT 1998


Part One: Introduction

Background

1.1 The power to levy taxes is one manifestation of the sovereignty of Parliament. The Bill of Rightsprovides that no charge on the subject shall be levied by pretence of prerogative without the consent ofParliament (2 Will. and Mar. (. 2), art. 4). Thus since 1689 Parliament has exercised the power to impose taxesand duties and has charged the Revenue authorities with their collection. The produce of their exertions is paidinto 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 corefunction of raising the revenue required to fund public services. In Commissioners of Inland Revenue v NationalFederation 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 themisconduct 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 thecase reached the House of Lords—Commissioners of Inland Revenue v National Federation of Self-Employedand Small Businesses Ltd (1981) 55 TC 133. Lord Diplock described the power (at page 163) as “a widemanagerial discretion as to the best means of obtaining for the national exchequer from the taxes committedto their charge, the highest net return that is practicable having regard to the staff available to them and thecost of collection”, and added that “if it were established that the Board were proposing to exercise or to refrainfrom 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 itwere brought to the attention of the court by an applicant with “a sufficient interest” in having the Boardcompelled to observe the law”.



1.3 Lord Diplock also noted (at page 163) that the scope of taxpayer confidentiality is limited to “informationabout individual taxpayers’ affairs that has been obtained in the course of their duties in making assessmentsand collecting the taxes”. Therefore, it does not necessarily permit HMRC to withhold information about itsofficial conduct (which is protected by Official Secrets legislation that applies to all other Departments) fromParliament 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 andCustoms 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 thedirect 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 (section1(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 andnational insurance contributions) for which the Commissioners of the predecessor departments (Inland Revenueand 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 theCommissioners 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 hasthe 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 predecessordepartments (section 5(2) CRCA) and may do anything which they think necessary or expedient in connectionwith the exercise of their functions, or incidental or conducive to the exercise of their functions (section 9CRCA). The Commissioners appoint staff, known as officers of HMRC (section 2(1) CRCA). An officer ofHMRC shall comply with directions of the Commissioners (whether he is exercising a function conferred onofficers of HMRC or exercising a function on behalf of the Commissioners) (section 2(3) CRCA). All thestatutory functions of the officers of the two predecessor departments now vest in officers of HMRC (sections6 and 7 CRCA).

1.7 There are currently six Commissioners: Dame Lesley Strathie DCB, Chief Executive and PermanentSecretary; 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 andCredits; and Bernadette Kenny. The Commissioners meet formally and make decisions within HMRC’s Boardand Executive Committee (ExCom). ExCom is the executive decision making body for HMRC. The Committeeexercises 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 andChief 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 andensures the highest standards of corporate governance”. Ms Strathie was appointed Chief Executive andPermanent Secretary at HMRC on 13 October 2008:

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

1.9 Mr Hartnett has been a Commissioner of HMRC since the 2005 merger, having held a similar positionpreviously as a Member of the Board of Inland Revenue. When Mr Paul Gray resigned as Chairman of HMRCfollowing 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 ChiefExecutive, Mr Hartnett was appointed to a new post of Permanent Secretary for Tax on 13 October 2008. Inthis 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 experiencein tax:

“Dave joined the Inland Revenue in 1976. He spent nearly ten years on investigation work before, in1991, becoming Director of Claims Branch then Financial Intermediaries and Claims Office dealing withschemes for tax relief and deduction at source, non residents and trusts. In 1996, he moved to lead thetechnical teams on personal taxation then, in 1998, he was appointed Director of Capital and Savings.



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

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

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

1.11 First, Mr Hartnett’s de facto control of the High Risk Corporate Programme vests him effectively withthe 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 (includingMr Hartnett) are, in theory, normally only directly involved in signing off the settlement of the largest taxdisputes. However, the Comptroller and Auditor General of the National Audit Office (C&AG) found in hisrecent review that in two of the four largest settlements they examined “one of the Commissioners approvingthe 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, “Taxofficials to soften stance on avoidance” August 19 2010) that HMRC will adopt a less combative approach toresolving tax disputes with businesses. According to the report:

Dave Hartnett ...said there had been examples of officials being too “tough” in disputes over taxassessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-whiteabout 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 Hartnettsaid: “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 gotit 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 themodern world. We are committed to handling disputes in a non-confrontational way and collaborating withcustomers wherever possible”.

1.14 In spite of the fact that the Civil Service Code states (in paragraph 7): “you must not accept gifts orhospitality or receive other benefits from anyone which might reasonably be seen to compromise your personaljudgment or integrity”, it emerged in June 2010 that Mr Hartnett was “the most wined and dined mandarin inWhitehall” 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 biggestbusiness organisations and their advisers.1

1.15 On 25 July 2008 and 19 May 2009 Mr Hartnett had lunch and dinner respectively with officials ofGoldman Sachs. On 22 October 2007, he recorded a “Drinks Reception” by the Hundred Group of FinanceDirectors of the UK FTSE-100 (currently chaired by Vodafone’s chief financial officer who took over from theFinance Director of Prudential).2 Most prominent amongst his hosts were the “big four” accountancy firmsthat specialise in assisting big business and high net worth individuals to avoid tax, with whose representativeshe sat down 27 times. He ate with KPMG 10 times and went to one company reception. He also acceptedhospitality 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 Chairmanof the UK Board of Partners at Deloitte on 48 occasions since 1 January 2006.3

1.16 In response to the report HMRC explained that, “The relationships that Dave has forged have enabledHMRC to transform its relationships with business and other taxpayers. This has made a significant contribution1 The complete list is as follows: 24 May 2007—Lexis Nexis—Dinner; 11 May 2007—Steptoe & Johnson—Supper; 5/19/09—

Goldman Sachs—Dinner; 13 May 2009—Norton Rose—Dinner; 23 October 2008—Ernst & Young—Dinner; 22 September2008—FTSE 250—Dinner; 4 August 2008—KPMG—Dinner; 26 April 2008—AT Kearney—Dinner; 22 January 2008—Association of Revenue & Customs—Dinner; 31 January 2007—Tax Council Policy Institute—Dinner; 14 October 2008—Chartered Institute of Taxation—Reception; 2 April 2008—KPMG—Reception; 8/28/08—SARS-Lunch/Dinner; 10 May 2007—American Bar Association—Lunch; 28 June 2007—Said Business School of Tax, University of Oxford—Lunch and Dinner; 26October 2007—KPMG—Lunch; 8 October 2007—Sheriff of London—Lunch; 5 September 2007—Tax Payer Confidential—Lunch; 10 July 2007- Steptoe & Johnson LLP—Lunch; 21 June 2007—OECD—Lunch; 4 June 2007—PricewaterhouseCoopers—Lunch; 29 May 2007-PriceWaterhouseCoopers—Lunch; 18 May 2007—Alan Fellowes Associates—Lunch; 23 April 2007—Unquoted Companies Tax Committee—Lunch; 7 February 2007- Institute of Chartered Accountants ofScotland-Lunch; 2 February 2007-Steptoe & Johnson-Lunch; 1 February 2007- Washington DC Bar-Lunch; 31 January 2007-Wall Street Investment Bankers Association-Lunch; 25 September 2009-FDA-Lunch; 17 September 2009-BDO Stoy Hayward-Lunch; 28 April 2009-PricewaterhouseCoopers-Lunch; 3 April 2009-American Bar Association/Tax Committee of theInternational Bar Association-Lunch; 31 March 2009-Tax Journal-Lunch; 20 March 2009-ICAS-Lunch; 17 March 2009-GeneralCommissioners-Lunch; 12 March 2009-Egon Zehender-Lunch; 24 February 2009-Tax Council Policy Institute (US)-Lunch; 11November 2008-Deloitte-Lunch; 20 October 2008-KPMG-Lunch; 15 October 2008-Westminster Forum-Lunch; 9/15/08-TaxHelp for Older People-Lunch; 29 September 2008-SARS-Lunch; 25 July 2008-Goldman Sachs-Lunch; 17 July 2008-OECD-Lunch; 7 May 2008-ABI-Lunch; 14 March 2008-ICAS-Lunch; 15 November 2007-Inst of Chartered Accounts of England &Wales-Dinner; 30 August 2009-Various organisations @ International Fiscal Association Conference in Vancouver-Reception;25 February 2009; Tax Council Policy Institute (US)-Drinks reception/Dinner; 7 July 2009-Deloitte-Drinks reception; 19 October2008-Tax Executive Institute-Drinks reception; 22 October 2007–100 Group-Drinks Reception; 12 July 2007-Inst of CharteredAccounts of England & Wales-Drinks Reception; 1 May 200-Institute of Indirect Taxation-Drinks Reception; 22 March 2007-Association of Taxation Technicians-Drinks Reception; 11 December 2007-Association of Revenue & Customs-Drinks; 25January 2007-Employers Forum on Disability-Drinks; 24 January 2007-London Investment Banking Association-Drinks; 7 April2008- ICAEW Tax Club-Drinks; 14 Sept 2007-JP Morgan Dinner, Accommodation & Breakfast; 10 September 2009-ACCA-Dinner ; 12 December 2007-ASPIRE-Dinner; 17 September 2007-Ernst & Young-Dinner; 25 July 2007-Association of CharteredCertified Accountants-Dinner; 3 June 2007-PricewaterhouseCoopers-Dinner; 19 April 2007-Consultative Committee ofAccountancy Bodies-Dinner; 3 April 2007-A T Kearney-Dinner; 8 March 2007-Tax Law Committee-Dinner; 6 March 2007-Instof Chartered Accounts of England & Wales-Dinner; 26 February 2007-Chartered Institute of Taxation-Dinner; 13 February 2007-Baker Tilly-Dinner; 17 January 2007-McDermott Will & Emery UK LLP-Dinner; 28 September 2009-KPMG-Dinner; 7September 2009-BT-Dinner; 17 July 2009-KPMG-Dinner; 21 May 2009-Lexis Nexis-Dinner; 18 May 2009-Tax Practitioners-Dinner; 12 May 2009-Chartered Institute of Taxation-Dinner; 5 May 2009-Institute of Chartered Accountants of Scotland-Dinner; 2 March 2009-KPMG, PWC, E&Y, PWC-Dinner; 27 January 2009-Ernst & Young-Dinner; 12 November 2008-Individual-Dinner; 10 November 2008-Ernst & Young-Dinner; 5 November 2008-Individual-Dinner; 29 September 2008-Building Public Trust Awards Dinner; 26 September 2008-Queen’s College Cambridge-Dinner; 23 September 2008-AT Kearney-Dinner; 9 September 2009-Private Equity CEOs-Dinner; 11 July 2008-EATL-Dinner; 22 May 2008-Lexis Nexis-Dinner; 14 May2008-Association of Revenue & Customs-Dinner; 3 April 2008-Bankers Taxation Circle-Dinner; 4 March 2008-ICAEW-Dinner;25 February 2008-CBI-Dinner; 13 February 2008-Chartered Institute of Taxation-Dinner; 21 January 2008-Law Society-Dinner;11 October 2007-PricewaterhouseCoopers-Dinner; 30 October 2007-KPMG-Breakfast; 6 June 2007-KPMG-Breakfast; 24September 2009-PricewaterhouseCoopers-Breakfast; 17 September 2009-JP Morgan/Casenove-Breakfast; 30 October 2008-PricewaterhouseCoopers-Breakfast; 3 July 2008-KPMG-Breakfast; 7 April 2008-Deloitte-Breakfast; 18 February 2008-KPMG-Breakfast; 27 September 2007- Association of Taxation Technicians-Lunch; 5 February 2007-Guild of International Bankers-Annual Banquet.

2 The magazine Financial Director (Andrew Sawers, 30 Mar 2006) described the group in these terms: “It’s probably the mostinfluential organisation that you’ve never heard of. Operating behind the scenes, without an office, with not a single employee—not even a website that the public can access—The Hundred Group of Finance Directors represents the interests and concernsof FDs in Britain’s biggest organisations. Part-talking shop, part-lobby group, the Hundred Group operates with utmost discretion,meeting government officials to discuss tax or pensions issues, influencing the accounting standards setters at the UK andinternational level, and providing advice for its members on topics ranging from the euro to the conversion to IFRS”.

3 See (HC Deb, 28 April 2011, c 517W).David Davis (Haltemprice and Howden, Conservative):To ask the Chancellor of the Exchequer how many meetings the Permanent Secretary for Tax in HM Revenue and Customs hashad with the Chairman of the UK Board of Partners at Deloitte in each year between 2002 and 2011.— Email me when David Gauke speaks— Most recent appearances— Numerology— Full profile ...David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)There is no information held prior to 1 January 2006.As head of the tax profession for HMRC, the Permanent Secretary for Tax is responsible for ensuring that key business leaders,accountancy firms and leading tax professionals understand what HMRC expects in terms of tax compliance and administration.As a consequence, he meets a large number of private sector tax leaders on a regular basis which helps him deliver on thiscommitment. Since 1 January 2006 to the present, he has met the Chairman of the UK Board of Partners at Deloitte on 48occasions.



to the increased tax yield HMRC has achieved in the period”. The Department specifically denied Mr Hartnetthad received too much hospitality from the accountancy firms by asserting that: “If you are a jockey, you havegot to get on to the racecourse”.

1.17 In his first presidential speech at the Chartered Institute of Taxation’s Annual General Meeting on 17May 2011, the President, Mr Anthony Thomas (a specialist in the taxation aspects of smaller business and theprofessions), 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 beenworse”. He then criticised the perceived preferential treatment accorded to the large businesses and theiradvisers 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 10–20years ago: no special relationships; no cosy conferences; no favours, deals and understandings; no insidetracks and private access. Instead, there was straightforward dealing; openness and frankness with honestbroking and above all a genuine willingness to work together with total transparency and integrity. ... Thejob 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, asPermanent Secretary for Tax, has the delegated authority on behalf of ExCom to decide on issues of disclosureof information”. These powers have been used recently to withhold information about the controversialVodafone and Goldman Sachs settlements entered into by Mr Hartnett from Select Committees of the Houseof Commons, “for reasons of taxpayer confidentiality”.

1.19 However, Commissioners’ powers under section 18 of the CRCA to disclose information “for thepurposes of a function of the Revenue and Customs” include any disclosure the Commissioners “thinknecessary or expedient in connection with the exercise of their functions, or incidental or conducive to theexercise 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 theaccountability 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 CarolBristow—a director-level tax expert—as her personal aide. (Not even Sir Gus O’Donnell, the cabinetsecretary, has such a senior personal assistant.) How can Dame Lesley justify it when the civil servicefaces 25% cuts? Says one insider: ‘It’s because she’s finding it so hard to cope with the furore overDave Hartnett’”.

1.21 Similarly, HMRC’s General Counsel and Solicitor, Mr Anthony Inglese, who “is responsible for alllegal 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 ofFair Trading in 1991; then Head Lawyer at the Ministry of Defence in 1995; and in 1997 he was appointedDeputy Treasury Solicitor. From 2002 he was Solicitor to the Department of Trade and Industry (later theDepartment for Business, Enterprise and Regulatory Reform) before coming to HM Revenue & Customsin March 2008.

1.22 There were two very experienced tax lawyers at the director level (SCS2) at the time of Mr Inglese’sarrival. 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 andthe three directors constitute the Senior Management Team of HMRC’s Solicitor’s Office.4 Mr Inglesebelieves that public sector lawyers should be generalists. He was quoted by the The Lawyer magazine (10August 2009): “That’s the craft of the government lawyer ... You don’t stay in the same area and specialiseever more deeply. You move around, broadening and deepening your knowledge of the essential bits of lawyou 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 Wilkinsonjudgement on the Commissioners’ ability to exercise these powers to resolve tax disputes” and reported (inparagraph 2.36) that:

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

4 ??????



1.24 It would be recalled that when Mr Hartnett appeared before the TSC on 16 March 1011 and was askedby the MP for Hereford and South Herefordshire (Q150): “do you think the continued public controversy overthe 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 legalstrictures on us, refused to say anything about a particular taxpayer. I thought it might be helpful today ifI could say something about the mistakes and misconceptions that are out there, because they aresignificant. I have legal advice that enables me to answer those questions, but I cannot answer detailedquestions about the actual tax liability.

1.25 However on 12 September 2010 the very same MP for Hereford and South Herefordshire put it toselfsame Mr Hartnett [Q699] that: “There has been a deal done with Goldman, I think I am right in saying, inwhich they were—” but Mr Hartnett interrupted him with this remark which directly contradicts his evidenceof 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 Icould 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’sapproximately £450 billion of revenues, plays a critical role in ensuring the accountability and transparency ofHMRC to Parliament and the public. Section 1 of the National Audits Act 1983 (NAA) provides for theappointment and status of the C&AG. Section 2(2) provides that: “the Comptroller and Auditor General shallby virtue of his office be an officer of the House of Commons”. Section 1(3) provides that: “subject to anyduty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion in thedischarge of his functions and, in particular, in determining whether to carry out any examination under PartII of this Act and as to the manner in which any such examination is carried out; but in determining whetherto carry out any such examination he shall take into account any proposals made by the Committee of PublicAccounts”.

1.27 Section 6 of the NAA authorises the C&AG to carry out an examination into the economy, efficiencyand effectiveness with which HMRC has used their resources in discharging their functions while section 8 ofthe NAA gives the C&AG a right of access at all reasonable times to all such documents and information heldby HMRC as the C&AG may reasonably require for carrying out this examination. Furthermore, section 2 ofthe Exchequer and Audit Departments Act 1921 (E&ADA), authorises the C&AG to examine the accounts ofthe receipt of revenue by HMRC on behalf of the House of Commons in order to ensure an effective check onthe assessment and collection of revenue. Section 8 of the Government Resources and Accounts Act 2000provides the C&AG with a right of access to documents and information relating to HMRC’s accounts for thepurpose 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 reachingthe Goldman Sachs settlement, and that accrued interest was not recovered from the company. The C&AGrefused to investigate the matter, maintaining that he had “taken on board the concerns raised in [my] letter aspart of [his] review of HMRC’s procedures for resolving tax disputes on which [he] will be reporting in Julyas part of the Report on the Department’s accounts”. In the event, the report (HM Revenue & Customs 2010–11Accounts: Report by the Comptroller and Auditor General (7 July 2011)) disclosed (in paragraph 2.6) that theC&AG’s review only “considered whether the Department’s processes were adequate to establish a soundposition on the amount of tax due” but “did not involve coming to an independent judgement on the taxliability in individual cases”.

1.29 Yet, the review was triggered by what the TSC described as “allegations ... made in the press that caseshave 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 anindependent judgement on the tax liability in the sample of cases they examined in order to assure Parliamentand 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 casescannot be released subsequently”. The C&AG referred to section 18 of the Commissioners for Revenue andCustoms Act 2005 (which applies to HMRC) as the authority for this contention. However, section 182 ofFinance Act 1989 (which applies to the C&AG and his staff in the NAO) authorised the NAO to disclose intheir report any relevant information provided to them by HMRC in order to assure Parliament and the publicthat large and complex tax cases were not settled for a lower yield than might have otherwise been achievedby HMRC.

1.31 It is important to remember that while the PAC and the TSC have unqualified powers to “send forpersons, papers and records” relevant to their terms of reference, in light of the C&AG’s specific informationand investigatory powers, his resources (some 880 NAO staff) and his statutory role as “an officer of the Houseof 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 issubject 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 thereview that recommended the establishment of a new single revenue department, integrating Customs and theRevenue. Chapter 6 of his report [G. O’Donnell, Financing Britain’s Future: Review of the RevenueDepartments, 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 appearbefore the Treasury Select Committee (and other Select Committees as necessary) to account for decisions thathis or her department has taken in exercise of their statutory duties.... Ministers and Treasury officials will beprimarily 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 SelectCommittees (known as the “Osmotherly Rules”)5. Although the guidance has not been approved byParliament and has no parliamentary status, Select Committees have from time to time commented on itsprovisions. The current guidance notes that “Select Committees have a crucial role in ensuring the full andproper accountability of the Executive to Parliament” and that “Ministers have emphasised that, when officialsrepresent them before Select Committees, they should be as forthcoming and helpful as they can in providinginformation 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 toSelect Committees. Officials should be as forthcoming as they can in providing information, whether inwriting or in oral evidence, to a Select Committee. Any withholding of information should be decided inaccordance with the law and care should be taken to ensure that no information is withheld which wouldnot 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 theirfield of enquiry are unqualified, there are certain long-standing conventions on the provision of informationwhich 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 aDepartment feels that it cannot meet a Committee’s request for information, it should make clear itsreasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (withoutresorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosinginformation in open evidence sessions or in memoranda submitted for publication, Departments will wishto 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 thefact 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 theChairman 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 dealin 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 differencebetween tax avoidance and tax evasion is the thickness of a prison wall”. As Lord Templeman put it in anarticle—‘Tax and the taxpayer’, (2001) Law Quarterly Review 575, at 587—“The tax evader commits acriminal offence punishable with prison, penalties and fines. The tax avoider commits no offence and onlyrisks failure to avoid the tax”.

2.3 However, there is a vast grey area between pure avoidance and pure evasion, and as the then Directorof the Inland Revenue Compliance Division noted in 1997:5 After the Cabinet Office official E.B.C. Osmotherly who first formally issued it in 1980.



“if an ‘avoidance’ scheme relies on misrepresentation ... or concealment of the full facts, then avoidanceis a misnomer; the scheme would be more accurately described as fraud”.6

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 inrelation to all of the taxes, charges and duties within those powers. The wide range of offences available forthis purpose include statutory offences such as false accounting (section 17 Theft Act 1968), fraudulent evasionof income tax (section 144 Finance Act 2000), fraudulent evasion of national insurance contributions (section114 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 thecommon law offence of cheating, which applies equally to all of the taxes, charges and duties within thecollection and management of HMRC, because of its harsher penalties (the maximum penalty on conviction islife 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 apublished 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 needsto send a strong deterrent message or where the conduct involved is such that only a criminal sanctionis appropriate.

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

2.6 Since 1st September 2005, Civil Investigations under by HMRC have been conducted in accordance withthe principles set out in of Practice 9 (COP 9) and of Practice 8 (COP 8). The vast majority of cases of serioustax fraud are dealt with by HMRC under its COP, which offers complete immunity from criminal prosecutionso long as further false statements are not made as part of the investigation. COP 8 applies to all civilinvestigations 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, thematter will be investigated under COP 8. Thus the investigation is undertaken with a view to the financialrecovery of any tax, plus interest accrued and penalties that may be due. Civil investigation powers are morelimited 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 whereevidence of serious fraud is discovered during the course of a COP 8 investigation that the matter may bedealt 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 willconsider criminal prosecution in cases of tax fraud where documents are falsified or facts misrepresented inthe course of an avoidance scheme so as to enhance its credibility, the effect of the above stated application ofthe 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 describedas fraud or evasion.

2.9 However, it does not appear that this was fully explained to the TSC on 16th March 2011 when MrClasper 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 ... seeinga case of evasion in very big business in the recent past”. Furthermore, Mr Hartnett told the TSC on thatoccasion that “every time we settle an issue ... we look at the penalty position and if necessary we take legaladvice; sometimes external legal advice”, and on 12th September 2011 he further stated: “Our people will havelooked incredibly carefully at every case that we have litigated and won that involves avoidance, or that wehave 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 considerabledetail 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 annualbonuses paid to its high net worth employees in London. Two subsidiaries of the Goldman group were involvedin the scheme—Goldman Sachs Services Limited (“GSSL”) which provides the service of supplying staff toGoldman Sachs International (“GSI”) and other affiliated entities. GSSL’s principal office address is in theBritish Virgin Islands and its partner-directors are said to have been resident in New York where its fundamentalmanagement 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:6 See J Gribbon, “A Sterile Activity” The Tax Journal, September 22, 1997.



The payments in question were made under an “off-the-shelf” scheme (“the Scheme”) which GoldmanSachs International acquired for the sole purpose of avoiding NIC liabilities on the annual discretionarycash bonuses that were paid to the employees concerned in the years in question. The Scheme is oneversion of an arrangement under which the employer packages employees’ annual discretionary cashbonuses in a way that ensures that employees receive their cash bonuses precisely as promised (which theemployer, given the nature of its business, must of necessity pay) but in a form that is supposed to avoidany 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 optionsover 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 theshares that are not required to deliver the bonus and EBT reduces the number of shares underoption to take account of this;

(d) The employer contributes the annual cash bonus pool to the EBT and the EBT contributes theannual 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 cashbonus on the usual bonus payment date.

The absolute certainty of these arrangements is that employees end up with the same cash in hand as theywould have received had the employer just determined and paid the employees’ annual discretionary cashbonuses in an ordinary manner. Indeed, it would be disastrous for the employer’s business if thearrangements involved any risk that this would not be the result. Each and every step is planned in advanceand executed to a timetable with pre-scripted documents designed to produce that result. The only riskfor employees is if they fail to play their part by signing and returning the various pieces of paper withwhich they are presented at particular stages of the process. In that case they may just have to be paidtheir 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 derivedfrom their employment but the redemption proceeds of shares that initially had no value but which weresubsequently 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 “topersuade our customers not to attempt to engage in avoidance by ... optimising our operational response toavoidance; 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 alsoemphasises a strategic approach in litigating avoidance cases. Thus between 2002 and 2005, HMRC selectedcertain 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 decisionsin respect of the NICs liability which it said was due from GSI. On 13 December 2002, GSI appealed thosedecisions. On 10th December 2003, HMRC commenced proceedings in the Central London County Courtseeking repayment of some £30.81 million of unpaid NICs and interest. The reason for commencing CountyCourt proceedings, whilst the appeal was outstanding, was because HMRC is bound in the collection of arrearsof NICs by the Limitation Act 1980.7 On 4 February 2004, the proceedings against GSI were adjournedpending 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 thesettlement 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 interestaccrued on the NICs (£10.8 million as at 31st October 2005). The letter informed Mr Housden that “this is anoffer that is being made to all participants” and warned that “for the avoidance of doubt, please note thatshould litigation be necessary to resolve matters then interest will continue to accrue on the principal NICdebt”. Significantly, it also stated that:

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

7 The Limitation Act 1980 prevents any action to enforce recovery of amounts due after 6 years from the date on which theliability arose. However, the Act does not apply to Crown proceedings to recover “any tax or duty or interest on any tax orduty”. HMRC accepts that NIC is not a tax or duty, thus the Act places a time-bar on action for recovery of NIC.



2.16 In other words, GSI could have accepted the offer without paying anything if it had paid sufficientcorporation tax, income tax and NICs for the relevant tax year, as it would have been entitled to a full rebatefor the £23.2 million. All the other 21 companies that used the scheme accepted HMRC’s terms of settlementbut 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) inJune 2007. The LSS sets out HMRC’s approach for bringing tax disputes to a conclusion, whether by agreementwith the taxpayer, or by litigation. In particular, it focuses on the relevant factors for HMRC when decidingwhether to agree a settlement on the issues in question or to proceed to litigation. The LSS complements theAAS as a part of an overall strategy by HMRC to close the “tax gap”. The tax gap appears predominantlythrough 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 wherethe 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 contrastswith 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 statesthat “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”, HMRCwas justified to take the view that it had a strong case against GSI. Moreover, the LSS emphasises (in paragraph16): “in avoidance cases if our legal advice is strong, do not accept settlements for less than 100% of the taxand interest due”.

2.19 Consequently, HMRC’s position was that there was no question of settling with GSI. As HMRC hadalready settled with twenty one other taxpayers in 2005, to settle with GSI a few years after would not onlybe inconsistent with the terms it offered those taxpayers but could be a breach of the Department’s statutoryobligation to treat all taxpayers fairly in the exercise of its collection and management powers and aninfringement 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 2008by their request for a listing. On 9 December 2008, GSI and GSSL they made a joint application in the restoredappeal for a direction concerning a preliminary hearing. Mr David Goldberg QC (instructed by FreshfieldsBruckhaus Deringer LLP) acted on behalf of both GSI and GSSL while Mr Malcolm Gammie QC (instructedby 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 thesetransactions did not give rise to any liability to make NIC contributions. But in December 2008 GSI sought apreliminary issue which was “whether GSI is the secondary contributor in respect of employees of GSSL forthe purposes of the 1992 Act and the 1978 Regulations”. The preliminary hearing was sought on the basis thatits determination should be dispositive of appeals in relation to tax years 1997 and 1998 and largely dispositiveof the appeal in relation to tax year 1999. The reason for this was that the GSI employees were transferredfrom GSSL to GSI, meaning there would be a period in the tax year ending 1999 when the question of GSI’sliability would have still to be determined.

2.22 Under the Social Security Contributions and Benefits Act 1992, where earnings are paid, both a primaryand a secondary NIC are payable. The primary contribution is the liability of the earner but the secondarycontribution is the liability of “the secondary contributor”. Section 7 of the Act explains who the “secondarycontributor” is. In relation to employed earners who work under the general control or management of a personother than their immediate employer, there are detailed regulations in The Social Security (Categorisation ofEarners) 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 towhich 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 wouldbe GSI as the “host” employer. The issue of whether GSSL was a “foreign employer” is answered by referenceto Regulation 119(1)(b) of The Social Security (Contributions) Regulations, which identifies the question asbeing whether the employer is “resident or present in Great Britain when such contributions become payableor then has a place of business in Great Britain”. If GSSL, the actual employer, was not “present” within theterms of Regulation 119, then the person liable to pay the contributions was GSI as the host employer. IfGSSL, the actual employer, was present, then it was liable to pay the contributions. There is one qualificationto that broad statement, relating to the GSI employees. In relation to them, there can be no dispute that GSIwas 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 thecontributor), is entirely distinct from the question of whether the scheme worked. If it was established by thepreliminary 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 June1999. 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 GSSLrather 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 tobe a saving in costs because the issues that would eventually have to be determined by the tribunal would benarrower or, alternatively, will in fact be resolved. In the First-tier Tribunal, Dr Avery Jones refused to order apreliminary issue but in the Upper Tribunal, Mr Justice Norris, sitting in private in London on 21 October2009 allowed GSI’s and GSSL’s appeal and directed the determination of the preliminary issue by a freshlyconstituted First-tier Tribunal: see Goldman Sachs International & Goldman Sachs Services Limited v HMRC[2009] UKUT 290 (TCC).8

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 December2009 and the judgment—Goldman Sachs International v HMRC [TC00507]—was published on published on26 April 2010. As the title of the case shows, GSSL was removed as a party to the appeal. It was not representedbefore Judge Williams and did not give evidence to him. Instead GSI contended that GSSL was in thejurisdiction and so it, GSI, could not be host employer. HMRC challenged this on the ground that GSSL wasnot within the jurisdiction as a secondary contributor and that GSI, which was in the jurisdiction, was liablefor the secondary contributions as host employer.

2.27 Perhaps, as a result of the artificiality of this approach to litigation by Goldman Sachs, Judge Williamsconsidered it necessary to “make a further reservation about the evidence before” him. He said (at paragraph14):

I do not know the precise relationship between GSI and GSSL. They are clearly both linked within theGoldman Sachs group or groups of companies in some way, but I have not been given evidence of thenature of that link. I assume that neither of these two bodies controls the other, but the evidence is thatthey 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 cannotbe 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 recordin these proceedings are that it did not have a place of business in Great Britain at any time relevant to theseappeals”, and asked: “has GSI shown, on the balance of probabilities, that GSSL was wrong in thatsubmission?” Rejecting Mr Goldberg’s argument that there is a more subtle point here (ie that GSSL “can havea 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 nospecific definition of “place of business” in the 1979 Regulations or the enabling Act. It is a questionessentially of fact, though it may be examined in the context of other legislation dealing with places ofbusiness. And I do not need to digress into the interesting issue of whether there is a difference betweensomeone “establishing” a place of business in the jurisdiction and someone “having” a place of businesshere. Nor do I need to reflect on the discussion by Mr Goldberg QC about the meaning of “place ofbusiness” however established. This is because in my view the way the case was put to this tribunal, andto the Upper Tribunal before this provisional issue came for decision and when GSSL was party to thehearings, is such that, applying the balance of probabilities to the evidence and the submissions of theparties 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 timerelevant 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 anearlier hearing and the Upper Tribunal at the hearing that gave rise to this preliminary question. As it isno 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 theBritish Virgin Islands in 1991 told Companies House. It did so to cancel its previous registration of aplace of business in Great Britain. Companies House was specifically told that it was to take the letter “tobe notice of the company’s ceasing to have a place of business in Great Britain” as from the date of theletter, 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 anyrevocation of that statement, to the central authority dealing with such registrations.

8 In directing the hearing of the preliminary issue, Judge Norris said (at paragraph 43): “In considering my approach to remakingthe decision, I have tried to avoid being seduced by the blandishments of one side as to its willingness to settle (as to which ithas yet made no concrete offer) or by the blustering intransigence of the other and its determination to litigate everything to thebitter end. I think I should approach the prospect of settlement by reference to how responsible parties ought to behave indischarge of their duty to the tribunal”. However, it is fair to say that in addition to its duty to the tribunal, HMRC has astatutory duty of fairness to the twenty one taxpayers that accepted its terms of settlement both under the CRCA and underEuropean Union law on the prohibition of State aid.



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

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

You state that GSSL has a fully staffed office in London (and nowhere else). In fact GSSL has nooffice 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 anybusiness 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 endeavoursto comply with any wage withholding and social security obligations. This they do with help of GSNew York or the local country affiliates”.

Mr Housden confirmed this again the following year, writing on GSI notepaper to HM Inspector of TaxesLarge 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 doesnot in fact conduct a business in the UK. Historically, the fundamental management of GSSL hasbeen exercised in and from the United States. Accordingly, the company is not required to fileaccounts 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 ofthese letters that way. I read them as making a series of clear, unambiguous, considered statements in thepresent tense to explain why the GSSL accounts were not available at Companies House or otherwise tothe public or to enquirers in Britain and why GSI did not regard GSSL as within the jurisdiction of UnitedKingdom corporation tax. The letters also indicate the advantages to GS of that arrangement. I also notethat in writing these letters Mr Housden, who I am told was a GSSL director at the time, was not writingin 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 forGSSL. That also appears consistent with an agreement between GSSL and GSI that I note below underwhich Mr Housden had been seconded as an employee to GSI. In addition, they had agreed that thefunctions 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 thatGSSL was in breach of statutory obligations in its withdrawal or non-renewal of that registration withoutcogent evidence that this was so when it has itself asserted that its non-renewal of registration was thecorrect course of action. And I would be most reluctant to find that Mr Housden had misrepresentedGSSL’s position to HMRC. I do not accept without evidence that deregistration and subsequentrepresentations of this sort would be made by such a company without all necessary advice andconsideration. 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 Ihave seen suggests GSSL made no taxable profits. It was, along with the registration of the company inthe British Virgin Islands, a way of keeping information about the GS accounts and payroll out of thepublic domain and confidential.

61. Fourth, I have had no evidence or submission from GSSL to say that it was wrong in taking thatposition 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, raisedit on any previous occasion either when appealing against the original section 8 decisions or in thesubsequent 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 thematter 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 ofthat 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 aplace of business in Great Britain at the relevant times. In doing so I do not consider I need examine anyof 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 evidenceof one witness for GSI and was given limited documentary evidence”. He then elaborated on this evidence inparagraph 5 of his judgment thus:

The evidence before me came from two sources. The first consisted of two witness statements and oralevidence of an individual witness who was not working in the relevant area of the GS group at the timesrelevant to these appeals but became responsible for some of them after that time, together with anassemblage 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 notgive evidence on this occasion despite being present in London. Judge Williams’ conclusions on the evidenceand 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 hadderegistered from Companies House and did not in that sense have an address for service. It was notliable 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 employeesin the United Kingdom. If it was profiting from such services (and I have no evidence that it did) then itwas not paying tax in the United Kingdom on such profit. Rather, its relationship with its employees wasrestricted because it had passed the benefit of their service to other companies in the GS group—inparticular GSI.

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

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

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

84. So the functions ... about NI contribution collection and statutory payments, were in fact undertakenin the United Kingdom by GSI from the date of that agreement. Mr Goldberg QC was unable to offerevidence about the termination of this agreement, and the witness clearly had no evidence to assist. Itherefore take that agreement to be in effect at the times relevant to this appeal. That is also consistentwith the point made by Mr Gammie QC that the notepaper used for correspondence by Mr Housden, andmore 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 thewitness and in the documents. These included her letter of engagement. The witness told the tribunal thatshe was not aware of precisely what part of the GS organisation had sought to recruit her or hadinterviewed her. Her letter of appointment was a GSI letter sent from an executive director at the LondonGS 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 toGSI 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 GSIletters 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 wereauthorised to agree terms of and execute on behalf of the company all employment offer letters, and aseries of subsequent resolutions to similar effect. But I was shown no offer letter executed by anyone onbehalf of GSSL. They were all GSI letters in the form noted above. Nor were all of them executed bypersons named in the resolution I was shown. I was shown one letter to a new employee dated 10 February1997, and another dated 19 March 1997 signed by someone named in such a resolution, Steven Ricci, butthe resolution was dated the following year, on 8 January 1998, and the letters was both GSI letters—notGSSL 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 nostaff working for it in the United Kingdom. HMRC do not dispute that GSSL was the employer, but theonly evidence I have seen suggests that GSI acted as agent for GSSL in making those appointments. Theevidence also makes clear that the employees did not undertake business for GSSL. They undertookbusiness only for GSI or other GS affiliates. Even the payroll and similar functions were performed forGSSL 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 inconsiderable 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 UnitedKingdom at the GS London campus. I find no significant evidence of that. I do not put much weight onthe absence of any nameplate on the doors of offices it may use. Many important public and privateoffices in London do not announce to the public what they are. More important is the absence, in theevidence, of any regular use by anyone of any notepaper or other stationery indicating an address forGSSL in London. I put no weight on the evidence put forward by the witness of leases. The documentswere photocopies of extracts of leases, and not the complete documents. The witness had not seen theoriginal documents, and clearly had no specific knowledge, of any part of their contents or thearrangements 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 thebuildings occupied, for example, by the payroll function of the GS group. On the evidence of theagreement noted above, that was a GSI function in any event. I saw nothing suggesting that there wasany specific part of the GS campus that could be regarded in any way as occupied by GSSL. I regard asaccurate the contemporary statement by Mr Housden noted above that in fact GSSL had no office inLondon at all. ... there were no suggestions it had any office, place of business, branch or agency, oremployees 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, andpaid HMRC from those accounts. Again, I find this of little assistance. The correspondence about settingup the account was not with GSSL but with other GS entities. I was told by the witness that the authorityto open accounts rested in New York, not London, or elsewhere. The accounts were operated throughpowers 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 corporategroup is present for these purposes in the United Kingdom because there are individuals who are directorsor employees within the group who have powers of attorney to operate its British bank accounts. And thefunctions for which the payroll accounts were used were in any event being conducted, as a matter of factand of agreement with GSSL, by GSI. Further, the money in the accounts was largely passing through theaccounts from other GS entities to the intended employees or other recipients. Based on the accounts andother 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 thewitness 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 courtactions involving GSSL. I have no knowledge of the basis on which GSSL accepted service of thosedocuments. I cannot check who the other party was in each case because of the redactions. Nor had thewitness seen the originals. Nor did she have any relevant knowledge, because of her employment orotherwise, about the background to any of these documents or about the general GS procedures forreceiving and handling such actions. Nor did I receive any evidence from anyone who did have suchknowledge. It may have been—I do not know—that the documents were received by GSI or an affiliateand passed to GSSL, and accepted by GSSL within the GS group. Or it may be that GSSL was nominatedas the recipient, whether or not it was obliged to accept them, for reasons the GS group consideredappropriate. Or maybe England was regarded as a forum conveniens for the cases and no point was takenabout jurisdiction. The only issue on record—and the issue on which both Lord Scarman and LordWilberforce put weight in Oceanic—was that GSSL did not have a registered address for service becauseit had chosen some years before to withdraw its registration, and therefore its address for service, fromCompanies House. I am not satisfied that I have seen anything to persuade me that GSSL had an addressfor 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. Inparticular, he developed an argument about the expansion of the scope of the rules of service through theCivil Procedure Rules and otherwise. I record those arguments, but do not find they assist and therefore donot 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 administrativeobligation and a financial obligation to HMRC for each tax month or other earnings period. It is notlimited, in the way section 204 was, purely to an administrative issue. It is an obligation more of a kindthat Lord Edmund Davies regarded in that case as penal, and therefore to be construed narrowly. With thegreatest respect, I do not consider that this liability can be considered in any way as penal. The test hasto reflect continuing enforcement and the administrative and fiscal obligations and not merely the limitedkinds 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. Thisis for the reasons set out above. Most of the correspondence is represented as being undertaken by GSIand not GSSL, and it was agreed between GSI and GSSL that this should be so. There is no clear patternof correspondence between HMRC and its predecessors and individuals writing as GSSL employees froma 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 ofproceedings is an adequate form of presence to meet the test in regulation 119(1)(b)—an approach I donot accept—the evidence put forward does not show even on the balance of probabilities that GSSL couldbe 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 itsservants or agents. A further strand of Mr Goldberg QC’s argument was that GSSL was present becauseone of its directors, Mr Housden, was present here. Here again I was faced with the limits imposed bythis preliminary hearing. I was given little evidence about Mr Housden and none by him. I am preparedto accept that he had a role, in the English and Welsh company law sense, as a director of GSSL althoughI 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 aGSSL director but as a GSI director (in, I understand, the GS sense of director not the company lawsense). That exception was a letter written on GSSL notepaper on 7 October 1999 by Mr Housden forand on behalf of GSSL. The headed notepaper gave an address in the British Virgin Islands, not in theUnited 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 inthe 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 inthe United Kingdom for GSSL (rather than in New York, where GSSL’s central management and controlwas, or the British Virgin Islands, where it is registered) I was not told of them. The tax and related dutieshe undertook using a British address all appear, from the correspondence, to have been performed forGSI. This was so, as I have noted above, even when he was dealing with the tax and related affairs ofGSSL. It is therefore not clear that there is any evidence that he was in any meaningful sense the presenceof GSSL in London. Linked with that, although I am prepared to accept or assume that Mr Housden wasin the United Kingdom for a significant part of his time, I was given no direct evidence of this or aboutwhether he could be said to be here on the continuing basis noted as reflecting the obligations of asecondary 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 representGSSL 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 HousdenI was given no significant evidence of any individual present in Great Britain whose presence here couldbe 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 presencein Great Britain was sufficient of itself to constitute a presence in the United Kingdom of GSSL forcurrent purposes even if I assume (as it has not been established in evidence) that he was actually presentfor a sufficient time in the United Kingdom in each earnings period and that I further assume (as again ithas not been established in evidence) that he was actually authorised or charged with carrying out in GreatBritain any duties for GSSL (rather than GSI, given the terms of the agreement between the companiesset out above that I have seen, or more generally the GS group as a whole) of ensuring payroll compliancewith the relevant NI contributions obligations. Without those assumptions, the evidence in my view fallsfar 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 employerand that GSI was the host employer of the two named individuals throughout those parts of the period relevantto 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 NICsliability remained pending in the First-Tier Tribunal. The Upper Tribunal listed the appeal for hearing in themiddle of 2011. In regard to the related issue of whether the avoidance scheme worked (ie succeeded inavoiding 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) thatemployee bonuses paid as a dividend through a scheme to avoid NIC liabilities were earnings liable to NICsand would therefore expect to be successful in showing NICs liability in the case of Goldman Sachs. Thatjudgment was published on 7 July 2010. Shortly after, HMRC lawyers obtained legal advice from MalcolmGammie QC (who also represented HMRC in PA Holdings). His advice, based on the present state of thelitigation, 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 andcircumstances material for the decisions of HMRC and the Tribunal. Thus under the LSS and COP 8 theamount 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, giventhe value of the case, any such settlement would be expected to be completed between Goldman Sachs andthe legal and technical officers dealing with the case. However, it appears that the Permanent Secretary for Taxsettled 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 asfollows:

Present:Anthony Inglese [AI]Alan Evans [AE]—(Director SCS2—one of the two representatives of the Solicitor’s Office in the HighRisk 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 ofJuly 2010.



AE explained that at the High Risk Corporates meeting the previous week a late submission had come inabout 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 principalmight be protected, the interest might not. [Case Lawyer] said this was not correct; it was all covered, perhis note.

It was not clear whether DH had settled on £24m or on whatever the principal was. There was discussionabout 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 schemeusers. AI asked if there was a risk of that being re-opened. [Case Lawyer/Team Leader] saying that whilstwe would need to see the settlement paperwork, there would appear to have been a commercial deal, withconsideration 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 for5 more years, including as [Case Lawyer] explained making every conceivable point in the Tribunal, andputting 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 relationto 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 Courtwere public documents and could be copied by anyone interested in comparing the settlement sum withthe claim.

AI said that he would always want to assist Mr Hartnett, but not if this were “unconscionable”. Hereferred to the difficulty all those present at this meeting were having justifying a settlement without aninterest 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 theCRCA. As highlighted above, the House of Lords set out the limits of that discretion in the Fleet Street Casualscase. 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 thatthe Commissioners’ managerial discretion is as to the best manner of obtaining for the national exchequer thehighest net return that is practicable”. Similarly, in the House of Lords, Lord Hoffmann pointed out (at page114) that “the Commissioners are not ‘the Crown’, owners of the consolidated fund and able to deal with itsproperty like any other owner”.

2.38 It also seems to contravene Article 107 of the Treaty on the Functioning of the European Union whichprohibits State aid. State aid is defined as an advantage in any form whatsoever conferred on a selective basisto undertakings by national public authorities. Paragraph 21 of Commission notice on the application of theState 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 byArticle [107]. The Court of Justice acknowledges that treating economic agents on a discretionary basismay 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 revenueby 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, andHMRC’s evidence to the PAC on 16th November 2010 which led to this conclusion (Eighteenth Report HMRevenue and Customs’ 2009—10 Accounts):

20. The Department’s Litigation and Settlement Strategy states that, where its legal advice is strong, itshould not accept settlements for less than 100% of the tax and interest due. The Department maintainsthat it does set out to prove the tax liability, serve its assessment and then collect what is due. TheDepartment told us that the final decision on how to resolve each tax dispute has to be taken by twoCommissioners 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 commissionerand we have to have legal advice”, and emphasised that “there is a considerable amount of process before wewould ever get to an end result”. Based on this evidence, there was no binding agreement between HMRC andthe 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 interestprotected 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 necessarysteps to remedy what all the lawyers accepted was an unlawful settlement but he seemed to consider it hisduty 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 recoveringthe 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 whichstates 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 inRevenue and Customs, and they cover different areas, but on any decision there will be a minimum oftwo 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 wouldbe 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 withFreshfields LLP according to Mr Inglese’s order, Mr Inglese published an article on the LSS (jointly writtenwith Mr Geoff Lloyd, HMRC’s Director for Dispute Resolution, in the Tax Journal, 10 January 2011) whichappears 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 acollaborative and commercial approach to resolving disputes. This isn’t the case. First of all, to set thecontext, and as Dave Hartnett made clear in his Tax Journal article on the LSS in June 2007, the LSS isthere as a framework to ensure that disputes are resolved fairly and consistently with the law. It underlinesthe 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, encouragingcustomers 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 ofthe 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 believethe law points to a different outcome—ought not to be controversial: our duty is to collect the tax webelieve to be due ....

2.44 The article by Mr Hartnett referred to in the paper by Messrs Inglese and Lloyd (“Litigation andSettlement” Tax Journal, 11 June 2007) which followed the launch of the LSS states that “there are two rulesfor HMRC staff that stand out in the LSS as bright lines, not to be crossed”. The first rule is “that each disputeshould be settled on its own merits”. The second rule, which is directly relevant to the Goldman Sachssettlement, 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, settlementterms should also be based on all-or-nothing figures. There should be no compromise where our argumentsare strong; equally, we will not hold out for low-value settlements if our arguments are not strong enoughto support litigation, or if the issue is one that does not justify the use of litigation in the absenceof 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 lawrecognises a legal duty owed by the Revenue to the general body of the taxpayers to treat taxpayers fairly; touse their discretionary powers so that, subject to the requirements of good management, discrimination betweenone group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificialvictims”. He maintained that: “The duty has to be considered as one of several arising within the complexcomprised 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 Committeesrecently. The following exchange between Mr Hartnett and the MP for Hereford and South Herefordshirebefore the TSC on 16 March 2011 relates to the application of COP 8 under HMRC Criminal InvestigationPolicy to the larger business organisations:

Q165. Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue’s failureto charge penalties to big businesses when they understated their tax payable. The number was about £15million 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 thanthat but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure totake reasonable care. Most of the issues we resolve with big business in the UK are very significantdifferences 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 taxthat was under declared, which I have to say strikes me as a lamentable failure. It seems to me that itisn’t better than you promised to do in 2008. It feels a lot worse. What is the equivalent percentage of taxunder declared for small business?

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

Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasionby 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 businessis about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, ifyou 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, orworse, 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 whounderpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see thenumbers on that. Do you think you are offering a credible threat to big business, in line with HMRC’sstated 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 earlieron, over the last four years we have increased that in relation to big business by more than 25%. If I lookat the list of cases we have taken to the Tribunal—this is all public domain information. Firstly, thePrudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we havewon. 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 whetherthere is a penalty position. If I go back to the £15 million you mentioned earlier on, I happen to knowone 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 seniorofficials 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, giventhat 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 necessarywe 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, orappears to be tenable, but has unintended and unexpected tax revenue consequences. The second one istaking a tax position that is favourable to the taxpayer without openly disclosing that there is uncertaintywhether the significant matters in the tax return accord with the law. Those are the two practicalinterpretations 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 ofmisrepresentation and concealment. Where a taxpayer files a return “without openly disclosing that there isuncertainty whether the significant matters in the tax return accord with the law”, the relevant scheme wouldbe more accurately described as evasion. Such cases may not amount to “serious fraud” under COP 8 towarrant 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, 30March 1993:

“The common law offence of cheating the Public Revenue does not necessarily require a falserepresentation either by words or conduct. Cheating can include any form of fraudulent conduct whichresults in diverting money from the Revenue and in depriving the Revenue of the money to which it isentitled. It has, of course, to be fraudulent conduct. That is to say, deliberate, dishonest conduct by thedefendant to prejudice, or take the risk of prejudicing, the Revenue’s right to the tax in question knowingthat 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 vMavji [1987] 1 WLR 1388. Maji established that in relation to the conduct element of the offence, there doesnot need to be any overt act of “deception” on the part of the defendant: it can be satisfied by an omission toreport taxable income, or register for VAT. Mr Mavji was the controlling director of a trading company whichdealt in large volumes of gold in such a way that, but for charging and retaining large amounts of VAT, thecompany would have traded at substantial loss. When HMRC discovered the company had charged and notaccounted 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 anyrepresentations to HMRC and had not therefore “deceived” HMRC in any way. The Crown Court rejected thisargument, 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, andany deprivation need not be permanent. Clearly, the offence still applies where HMRC discovers the fraud andthe 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 whichincurred substantial PAYE and NIC liabilities. The corporate group was structured in such a way that thosecompanies never had sufficient funds to pay, or assets worth HMRC proceeding against. However the defendantwas not aiming to evade the tax permanently, just to delay the payment; he had in fact made large tax paymentsover 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 hasno right to escape payment of the tax. In any event, it is apparent that the Goldman Sachs settlement securedby Mr Hartnett contradicts his evidence that “every time we settle an issue ... we look at the penalty positionand 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, andhighlighted the similar Prudential settlement:

Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some £6.2billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggestinga list showing £6.5 billion. Something like just under £6 billion of that was from fighting group litigationchallenges. Only about £100 million was on corporation tax avoidance cases. That is £100 million out ofthe £6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunalsince 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 thosenumbers, 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 30or so following cases. The analysis you have given, which I have not made for myself, so I cannot reallycomment 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 withlarge businesses that are following on from some of those cases? On VAT, it is more usual to find thateach case has to be heard on its own merit, so you will find that there are often a lot of other companiesstanding behind what may appear to be quite a small number of cases but actually involves quite a largeamount of tax.

Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel verystrongly about the high penalties being imposed on small business, and the small penalties being imposedon large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages beingcharged in penalties and, of course, when you have a negotiated settlement, almost by definition there isno standard compared to which you can charge penalties, which build in a bias in favour of largecompanies, 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 ascheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, therewas no penalty charged at all, as far as I am aware, but there are countless cases-every constituency hasthem-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 theHouse 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 madethe point about the drop in paying penalties.

Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated andwon that involves avoidance, or that we have settled, to determine whether the law allows a penalty to betaken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that Iknow 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 pointfirst. In order to take a penalty from large business, we have to find that the law can be applied. Withsmaller business, there is more often dishonesty, or-

Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with youwith 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 termsof 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 intobig 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 legalreport: “HMRC win on ‘mis-labelling’ (Tax newsflash, June 2009)”. It says that the Court of Appealaffirmed 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 thatpenalties should be paid. These people have attempted to get away with not paying, and they have beenfound out.

Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appealis 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 yousimply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basisfor charging a penalty?

Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itselfenough 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. Itseems to be an extraordinary thing.

2.54 It would be recalled that HMRC’s non-executive Chairman, Mr Clasper, provided the followingsupporting 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 thecontext 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, whichimplies 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 joband the company will go down. There is obviously going to be some case somewhere in the world wherethis is not true, but companies will not evade. What they will do is construct their affairs in a certain waythat they think legally reduces the amount of tax. Our challenge is, first of all, to block some of thoseways by things like disclosure regimes and so on, and then, secondly, when they interpret what they havedone as legally meaning that they do not have to pay the tax, challenging that interpretation and gettingthe money in. There is this thought that it is laughable that companies will not evade tax, but the issue isthey 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 wasOperational Managing Director, and was formally Chief Executive at BAA plc. Similarly, the remaining fourmembers of HMRC’s Non-Executive Directors (described officially as “senior business figures from outsidethe 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’sstrategic direction, and provide support in monitoring and reviewing progress”) have similar backgrounds inlarge companies, and comprise a former Chief Information Officer of Tesco, a former Group Human ResourcesDirector of ITV, a former Group Finance Director of HBOS plc and Chairman of Insight Investment, and aprevious 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 Departmentalbias in favour of big businesses and high net worth individuals. On 16 June 2011, Mr Graham Black, Presidentof 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 someextra resources are being used, rightly, to target fraud, the number of senior staff capable of dealing withcomplex avoidance and evasion will tumble yet further, by over 400. There is a huge tax gap, caused inpart by well-advised businesses and individuals stepping aside from taking their share of the pain. Whyshould banks and major businesses be let off the hook, when most citizens in the UK pay their fair sharein 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 theTSC. 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 [email protected]

Rt Hon Margaret HodgeChair, Public Accounts [email protected]

Andrew Tyrie MPChair of the Treasury [email protected]

Dear Sirs and Madam,


Until very recently, I worked as a lawyer in the Personal Tax Litigation team in HMRC’s Solicitor’sOffice, which deals with appeals before the Tax Tribunals and the Courts on various revenue mattersincluding schemes used by multinational companies to pay bonuses to high net worth employees whileseeking 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 legaladvice to policy directorates and operational case teams on matters arising from the Freedom ofInformation Act 2000, the Data Protection Act 1998, the confidentiality and disclosure provisions in theCommissioners for Revenue and Customs Act 2005, the security of information and HMRC’s obligationsas a data controller.

Information about the internal administrative arrangements of HMRC indicates that at about the sameperiod during which HMRC’s Chief Executive and Permanent Secretary, Dame Lesley Strathie, told thePublic Accounts Committee (in relation to Vodafone) that “it would be absolutely wrong to suggest inany 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 LesleyStrathie 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 youhave 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 questionof whether the law applies or not—such disputes should be settled on all-or-nothing terms. It goeson 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 absoluteminimum that HMRC should settle for was £2.4 billion. You have referred a number of times to theissue of process. The process that concerns me and may concern others is that, instead of the HMRC’sspecialist in controlled foreign corporation law being consulted on the terms of a deal, it is done inprivate between your permanent secretary for tax, Mr Hartnett, and the company concerned—in thiscase, Vodafone—without the proper checks and balances that you would expect to see, or to ensurethat the right advice from within HMRC, from those who knew about the details of controlled foreigncorporation 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’tbelieve that any decision was taken in private. There comes a point when the commissioners have todecide what the right course of action is in the circumstances that they are in. The director generalfor business tax was the accountable commissioner in the first instance here, and the business taxsenior management team. The permanent secretary for tax is the second commissioner. Then we havecounsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way thatthe permanent secretary for tax did some deal in private.

The Public Accounts Committee’s Report states (at paragraph 20) that: “The Department’s Litigation andSettlement Strategy states that, where its legal advice is strong, it should not accept settlements for lessthan 100% of the tax and interest due. The Department maintains that it does set out to prove the taxliability, serve its assessment and then collect what is due. The Department told us that the final decisionon 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 providedby Leading Counsel for HMRC in the matter in July 2010.

Director explained that at the High Risk Corporates committee meeting the previous week a latesubmission had come in about a deal on which Mr Dave Hartnett had ‘shaken hands’ with theTaxpayer 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 principalmight 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 wasdiscussion about whether there could be justification for settling without interest, especially in viewof the Litigation Strategy. A particular concern was the 200[x] ExCom settlements with all the otherscheme users. Mr Inglese asked if there was a risk of that being re-opened. Case Lawyer/TeamLeader saying that whilst we would need to see the settlement paperwork, there would appear to havebeen 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 penaltyfor having resisted for [x] more years, including as Case Lawyer explained raking every conceivablepoint in the Tribunal, and putting up a ‘stooge’ witness when [the Taxpayer Company’s ManagingDirector] was the obvious person to answer questions.

The advice provided by Leading Counsel for HMRC in the appeal was broadly positive both onwhether [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 fromSI [Specialist Investigations], but only if this took only a day.

Taxpayer Company had apparently suggested the principal might be £[x]. Discussing whether thisaltered things. Case Lawyer pointed out that the Claim Form and probably the Particulars of Claimin the County Court were public documents and could be copied by anyone interested in comparingthe 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 settlementwithout 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 followingconclusion and recommendation:

10. There is little transparency for the taxpayer over the way that tax disputes with large companiesare resolved. While we recognise the Department’s obligation to ensure taxpayer confidentiality, theDepartment should consider the scope for increasing transparency in the area of large and complextax cases and for assuring Parliament and the public that due process in the resolution of these casesis being followed. We look to the Department to cooperate fully with a National Audit Office reviewof its procedures for resolving tax disputes.

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

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

(a) the statutory obligations of the Commissioners and officers of HMRC under the Commissionersfor 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 [email protected]

Mr Chuka Umunna MPTreasury [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 andCustoms (HMRC) settled a tax dispute with a multinational company. As Director responsible for theNAO’s work on this area, the Comptroller and Auditor General (C&AG) as head of the National AuditOffice, 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 ispart of the C&AG’s annual examination of tax and duties systems conducted under section 2 of theExchequer and Audit Departments Act 1921. We expect to publish the results as part of the C&AG’sReport 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 pastfive years. We will be assessing whether the processes followed in these cases complied with relevantlegislation and with extant HMRC processes including, where relevant, the Litigation and SettlementStrategy. The case you mention will not necessarily be one of those that we examine, but we intend tostudy 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 theC&AG were limited to those with more than £100 million tax/NIC at risk and so should not have included theGoldman 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 disclosepotential criminal offences such as fraud by abuse of office, misconduct in public office and cheating theRevenue in addition to other potential breaches of the law and referred specifically to the C&AG’s legalobligations 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,



CONFIDENTIAL

1. I respectfully present my compliment to the Comptroller and Auditor General (“C&AG”) and humblyrequest 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 1998Act) to the C&AC to the effect that:

“Information about the internal administrative arrangements of HMRC indicates that at about thesame 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 tosuggest in any way that the permanent secretary for tax did some deal in private’, said PermanentSecretary 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 beliefthat the information disclosed tends to show one or more of the following situations identified in section43B of the PIDA 1998:

(a) That a criminal offence or criminal offences (fraud by abuse of office—see section 4 of the FraudAct 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 March1993) 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’sstatutory functions of collection and management of revenue (taxes, duties and national insurancecontributions) 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 BusinessesLtd [1981] STC 260 at 269 (Lord Diplock): “In the exercise of these functions the Board have awide managerial discretion as to the best means of obtaining for the national exchequer from thetaxes committed to their charge the highest net return that is practicable having regard to the staffavailable to them and the cost of collection. ... [H]owever ... if it were established that the Boardwere proposing to exercise or to refrain from exercising their powers not for reasons of ‘goodmanagement’ but for some extraneous or ulterior reason that action or inaction of the Board wouldbe ultra vires”.)

(c) That top officials of HMRC have failed, are failing or are likely to fail to comply with the UnitedKingdom’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 basisto undertakings by national public authorities. (See paragraph 21 of Commission notice on theapplication 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 caughtby Article [107]. The Court of Justice acknowledges that treating economic agents on adiscretionary basis may mean that the individual application of a general measure takes on thefeatures of a selective measure, in particular where exercise of the discretionary power goes beyondthe simple management of tax revenue by reference to objective criteria—Case C-241/94 Francev. 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 assurancesgiven to the Public Accounts Committee in November last year “that the final decision on how toresolve 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’sself-imposed administrative duties under their published Litigation and Settlement Strategy andAnti-Avoidance Strategy.

(f) That information tending to show any matter falling within any one of the preceding paragraphshas 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 onbehalf of the C&AG, stated:

“We are currently carrying out a review of HMRC’s procedures for resolving tax disputes. The workis part of the C&AG’s annual examination of tax and duties systems conducted under section 2 ofthe 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 thepast five years. We will be assessing whether the processes followed in these cases complied withrelevant legislation and with extant HMRC processes including, where relevant, the Litigation andSettlement Strategy. The case you mention will not necessarily be one of those that we examine, butwe 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 companyand the amount of national insurance contributions at stake. It is not clear from Mr Keane’s letter whetherhe 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 theprovision 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 PIDA1998 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 whetheror not to investigate is based upon various criteria designed to ensure the most effective use of theresources 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 “variouscriteria designed to ensure the most effective use of the resources at [the C&AG’s] disposal in safeguardingthe public interest” upon which a decision whether or not to investigate a disclosure received under thatlegislation were taken into account. Just like the NAO’s webpage, Mr Keane’s letter did not disclose whatthese criteria are.

10. Parliament must have conferred the C&AG with the discretion under the PIDA 1998 with the intentionthat the C&AG should use it to promote the policy and objects of the legislation. Thus a decision whetheror not to investigate a disclosure that fails to promote the purpose of the PIDA 1998 may be tainted byillegality 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 understandcorrectly 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, whereworkers had known of the dangers that led to disaster, but were unwilling or unable to warn ofthem effectively.

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



The Act seeks to achieve this by offering a right to redress in the event of victimisation if workersraise 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 encouragethem 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 publicinterest disclosures. This is evident from the comments of the Nolan Committee (Committee on Standardsin Public Life—Second Report, Cm 3270–1 (May 1996) p. 21) which was said during the ParliamentaryDebates (Hansard HL 11 May 1998, Lord Borrie QC, col. 889) on the PIDA 1998 to best summarise thepurpose 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 regulatoryor funding body. But the regulator is usually in the role of detective, determining responsibility afterthe 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 badlywrong in local public spending bodies, it has frequently been the tip-off to the press or the localMember of Parliament—sometimes anonymous, sometimes not—which has prompted the regulatorsinto action. Placing staff in a position where they feel driven to approach the media to ventilateconcerns 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 “theproper conduct of public business, fraud, value for money and corruption in relation to the provision ofcentrally-funded public services” under the PIDA 1998 is consistent with his position as the externalauditor for the central government sector. Therefore, the legislation that governs the C&AG’s role as theauditor for the central government sector is relevant to the C&AG’s legal obligations as a prescribedperson under the PIDA 1998.

15. Section 6 of the National Audit Act 1983 (“NAA 1983”) authorises the C&AG to carry out anexamination into the economy, efficiency and effectiveness with which HMRC (or any other Governmentdepartment) 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 allsuch 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 DepartmentsAct 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 moneywhich is by law payable into the Exchequer, shall be examined by the Comptroller and AuditorGeneral on behalf of the House of Commons in order to ascertain that adequate regulations andprocedure have been framed to secure an effective check on the assessment, collection, and properallocation of revenue, and the Comptroller and Auditor General shall satisfy himself that any suchregulations and procedure are being duly carried out.

(2) The Comptroller and Auditor General shall make such examination as he thinks fit with respect tothe 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 theHouse 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 iswide enough to enable the C&AG to investigate all the specified matters relating to the provision ofcentrally-funded public services under the PIDA 1998, namely: (a) value for money; (b) the proper conductof 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 ofall central government departments, agencies and other public bodies the expenditure and revenue carriedout each year (amounting to some £950 billion across 475 accounts in 2009–10) have not been known toaddress the question of culpability.

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

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

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

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



21. But on that occasion it was emphasised that that “the NAO would not be auditing particularsettlements” (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 SueCameron, ‘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 forhis apparent decision not to investigate the matter) is sufficient for the purpose of the PIDA 1998, whichrequires 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 Keaneunderstood 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 AccountsCommittee 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 respectfullysuggested that this disclosure to Parliament ought to be a relevant consideration in the C&AG’s decisionwhether 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 governmentto account for the use of public money and to help public services improve performance. Therelationship 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 AccountsCommittee (PAC), other select committees from both Houses and individual Members in theirscrutiny of public expenditure and service delivery.

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

27. It was against this background that the Public Accounts Committee concluded recently (EighteenthReport: 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 ithas a legal duty not to disclose taxpayer details, except in certain limited circumstances. This appliesto all taxpayers, whether they are an individual or a publicly quoted company. This inevitably makesit difficult to obtain assurance that the Department resolves tax disputes appropriately.

28. Therefore, should the Public Accounts Committee or the Treasury Select Committee decide toinvestigate the subject matter of this disclosure, they may not have access to documents and informationthat will be readily available to the C&AG. It is significant that the afore-mentioned Report of the PublicAccounts 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 areresolved. While we recognise the Department’s obligation to ensure taxpayer confidentiality, theDepartment should consider the scope for increasing transparency in the area of large and complextax cases and for assuring Parliament and the public that due process in the resolution of these casesis being followed. We look to the Department to cooperate fully with a National Audit Office reviewof 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 informationand documents on the part of the Parliamentary Committees that have received the disclosure or whatmay be regarded as the legitimate expectations of Parliament and the taxpayer on such a controversialmatter of public interest in arriving at his decision. Indeed, it does appear that Mr Keane’s response dated25th 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 inlight of the C&AG’s statutory authority under the PIDA 1998 to consider public interest disclosuresrelating to “the proper conduct of public business, fraud, value for money and corruption in relation tothe 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 opportunityto 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 0AA



Mr 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’sreply of 25th March was also sent to the Chair of the PAC9 and the Chairman of the TSC10 and a memberof 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 beengiven to the investigation of the disclosure in your email of 7 March under the Public Interest DisclosureAct 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 theEmployment Rights Act 1996 (as amended by the Public Interest Disclosure Act 1998), to whomdisclosures can be made relating to “the proper conduct of public services, value for money, fraud andcorruption 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 thecentral 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 mosteffective 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 isconfined to a particular body or whether there is a potential impact across several government bodies. Wealso consider whether the issue is ongoing or is likely to recur, or whether it relates to a set ofcircumstances which have passed.

Based on these criteria, I can assure you that we have taken on board the concerns raised in your letter aspart of our review of HMRC’s procedures for resolving tax disputes on which we will be reporting inJuly as part of the Report on the Department’s accounts, as Mr Keane advised in his letter to you of 25March. FOR REASONS OF TAXPAYER CONFIDENTIALITY, our report will not include details of anynamed 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 madein the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Wouldyou consider as an organisation publishing or providing to us information about that case so that thepublic 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 whetherthe 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 haveconcluded 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 notablethat the exact phrase was used to justify a wrong contention. Moreover, as explained below, in his report (HMRevenue & 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 butclaimed that “legal restraints over taxpayer confidentiality mean that the details of these cases cannot bereleased subsequently”. Furthermore the C&AG referred to section 18 of the Commissioners for Revenue andCustoms Act 2005 (which applies to HMRC) as the authority for this contention rather than to section 182 ofFinance Act which applies to the C&AG and the NAO, and which authorises them to disclose relevantinformation to counter allegations that these cases have been settled inappropriately for a lower yield thanmight have otherwise been achieved. More significantly, the stated nature and scope of the NAO’s examinationvindicates my stated concern that the examination may not be sufficient for the purposes of the PIDA.9 On 31 May 2011, I received a letter from the Clerk to the PAC which stated:

“Margaret Hodge has asked me to reply on her behalf to your letter to her of 23 May 2011, and to say that she has noted thecontents.Many thanks for your interest in the work of the Public Accounts Committee”.

10 On 18 July 2011, I received a letter from the Senior Committee Assistant to the TSC which stated:“Thank you for writing to Andrew Tyrie MP, Chairman of the Treasury Committee. The Chairman has asked me to reply onhis behalf; please accept my apologies for the delay in doing so.The Treasury Sub-Committee recently took evidence on the subject of how HMRC deals with the tax affairs of large multi-national corporations as part of its inquiry into the administration and effectiveness of HMRC. The transparency andaccountability in the way HMRC approaches high profile cases was of particular concern to some of the Members of the Sub-Committee. The Sub-Committee will be publishing its conclusions and recommendations on this matter, as well as other issuesraised during the inquiry, in a report that will be published towards the end of this month”.



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: “subjectto any duty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion inthe discharge of his functions and, in particular, in determining whether to carry out any examination underPart II of this Act and as to the manner in which any such examination is carried out; but in determiningwhether to carry out any such examination he shall take into account any proposals made by the Committeeof 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’sprocesses for settling large and complex disputes as follows:

2.4 In November 2010, the Committee of Public Accounts examined the Department on its arrangementsfor settling tax disputes with large companies. In the light of this, the Comptroller and Auditor Generaldecided 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 effectivecheck 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 largestcompanies. ... We examined a sample of 27 disputes, to assess whether the Department had complied withstatutory requirements and its own processes for resolving disputes. Our review considered whether theDepartment’s processes were adequate to establish a sound position on the amount of tax due; it did notinvolve 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 compliedwith statutory requirements and its own processes for resolving disputes” merely by considering “whether theDepartment’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 1983authorises the C&AG to come to an independent judgement on the tax liability in the individual cases heexamined, 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 thepublic interest disclosure I made to him and his assurances on the matter. It would appear that the C&AG, whois a prescribed person under the PIDA 1998 to whom external disclosures can be made relating to “the properconduct 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 (theC&AG’s discretion under section 1(3) of NAA 1983 being explicitly “subject to any duty imposed on him bystatute”) and settled principles of public law. As stated above, the 27 cases examined by the NAO werelimited to those with more than £100 million tax/NIC at risk, which would have excluded the GoldmanSachs settlement.

3.5 Secondly, it is also notable that the C&AG limited the scope of his review despite his statement to thePAC regarding the Vodafone settlement on 16 November 2010. It would be recalled that following the Chair’sremark (Q194) that their understanding was that HMRC’s accounts “could be qualified by the National AuditOffice 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 bea 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 onlyconsidering “whether the Department’s processes were adequate to establish a sound position on the amountof tax due” it is debatable whether the C&AG could have reached an informed decision as to whether “theremight be a case for qualifying [the Vodafone settlement] on grounds of irregularity” or “that a decision hadbeen made unreasonably”.

3.7 Thirdly, as explained above, the Litigation and Settlement Strategy states that “in avoidance cases if ourlegal advice is strong, do not accept settlement for less than 100% of the tax and interest due”. So informationon the strength or otherwise of the sample of 27 disputes the NAO examined is critical to any settlement andthereby 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 orcontingent liability in the trust statement” but that Mr Hartnett and Mr Alan Evans (the Solicitor’s Officer’ssenior representative in the High Risk Corporates Programme) “were able to convince them to accept lessdetailed information that did not give any indication as to whether [HMRC] thought [its] case was strongor weak”.



3.8 Yet section 8(1)(a) of Government Resources and Accounts Act 2000 vests the C&AG with “a right ofaccess at all reasonable times to any of the documents relating to the department’s accounts” while section8(1)(b) imposes a duty on the HMRC to give the C&AG “any assistance, information or explanation which herequires in relation to any of those documents”. Furthermore, the PAC had specifically asked HMRC “tocooperate 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 theextent to which the processes applied by the Department were consistent with: statutory requirements, forexample, 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 thearrangements for approving settlements”, and his conclusion (in paragraph 2.35) that he “did not identify anyinstances 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 toHMRC 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 andmanaging tax revenues. In practice, Commissioners are normally only directly involved in signing off thesettlement of the largest tax disputes. ... The resolution of most large and complex tax disputes will involveseveral Directorates, for example, experts in Corporation Tax and accountancy specialists, and also legaland policy advisers where relevant. Each company in the Large Business Service has a CustomerRelationship Manager, who is responsible for managing the Department’s ongoing relationship with thecompany across all taxes and duties, and for coordinating all the Department’s technical specialists relevantto the company’s tax affairs.

2.13 The Department established a High Risk Corporates Programme (the Programme) in 2006, andsettlements totalling over £9 billion have been reached with the companies participating in the Programmesince it began. At the time, many large companies had multiple, long-unresolved tax disputes, and in somecases 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 participatingcompany’s issues. The approach includes Board-to-Board, or other high level, engagement between theDepartment and the company with a commitment from both sides to apply high levels of resource toproviding information and resolving issues within an accelerated timeframe. In addition, the Departmentseeks agreement from the Board of a company within the Programme that it will in future work moreconstructively 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 agreeingwhich companies will be admitted to the Programme (based on factors such as the size, age and widerapplication 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, LargeBusiness Service and its membership includes the Directors of VAT; Corporation Tax, International andAnti-Avoidance; and Special Investigations and representatives from the Solicitor’s Office. Each casehas an Enquiry Coordinator, whose responsibilities include bringing together the work of the CustomerRelationship 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 initiallyresponsible for bringing together the relevant specialists in resolving tax issues. The Departmentencourages 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 theProgramme. 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 bereferred to the Programme Board before settlement where the tax under consideration exceeds £100million, and there is a proposal for the Department to concede one issue or more, or to accept less than100% 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 governancearrangements. The Department considered each of these cases to involve a single issue, with a range ofpossible outcomes for the tax due, rather than being the ‘all or nothing’ cases normally dealt with by theProgramme Board. The arrangements involved reducing the size of the team dealing with the case, andsign off by Commissioners without a prior reference to the Programme Board. In each case, the teamincluded the relevant Director, supported by Deputy Directors, and Commissioners were involved. Thesearrangements meant that decisions were taken at the most senior level, and relevant technical and legalexpertise remained available. The Department’s view is that the Programme Board would not have addedvalue 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 externalexperts.

2.29 In two of the four cases, one of the Commissioners approving the settlements had participated in thenegotiations and, in another case, both Commissioners had done so. Where Commissioners are directlyinvolved in negotiating settlements, particularly where the Programme Board is not used, there is lessindependent oversight of settlements to provide assurance, internally and externally, that these have beenreached on an appropriate basis. The Department has attracted criticism from Parliament and its own staffbecause of the absence of adequate separation between the analysis, negotiation and approval processesfor major tax settlements. The complexities of the issues in these cases make it more difficult todemonstrate that an appropriate tax liability has been assessed and legal restraints over taxpayerconfidentiality mean that the details of these cases cannot be released subsequently. [Commissioners forRevenue and Customs Act 2005, Section 18.]

2.30 We found cases where large companies wanted early engagement with a Commissioner to secure anauthoritative view of the Department’s position. The Department’s strategy for board level engagementwith large business means that contact between Commissioners and business leaders on specific andgeneral issues will continue to be a feature of its approach. The Department believes that a degree ofCommissioner involvement in resolving some tax disputes is inevitable. However, the Departmentrecognises that it needs to build its capacity to negotiate settlements on major cases in staff belowCommissioner level. This should help to reduce the frequency of taxpayers requesting the involvement ofCommissioners 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 Boardand those for referral to Commissioners. The threshold for referral to the Programme Board is based onthe total value of a settlement with a taxpayer, which usually covers more than one issue. The thresholdfor a referral to Commissioners is, however, based on the value of individual issues. We found a settlementworth more than £400 million, with issues totalling over £400 million conceded by the Departmentbecause it considered its position was weak, which was not referred to Commissioners because no singleissue exceeded £250 million.

2.32 The Department has a clearly defined approach to settling disputes, as set out in the Litigation andSettlement Strategy. An internal review of the Litigation and Settlement Strategy in December 2009 foundthat, when it was launched in May 2007, the extent to which it was understood by the Department’s staffvaried. Some staff did not appreciate the flexibility it offered, or thought it emphasised litigation. Thisinitially led to delays in some cases, and inconsistent application, creating an adversarial relationship withsome taxpayers. The Department does not currently intend to revise the substance of its Litigation andSettlement Strategy as its core message does not need to change, but is planning to relaunch the Strategyto make the messages clearer. This should assist in developing a common understanding within theDepartment 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 quantumto 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 isresponsible for selecting suitable cases and for monitoring progress.

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

3.13 The findings are also inconsistent with the oral evidence given to the PAC by HMRC’s Chief Executiveand 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. Thesesimilarities can be illustrated further by considering the membership of the Programme Board, which providesthe formal means for participation by lawyers, technical specialists, policy advisers, caseworkers that have aninterest in the case in any settlement. In fact the written evidence 15 June 2011 stated that current membershipof 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 theProgramme Board is not likely to benefit from the advice and governance that are supposed to be provided bythe two senior representatives of the Solicitor’s Office in the Board. Indeed it was the Director, Solicitor’sOffice, Mr Alan Evans, that was quoted as saying at the meeting in Solicitor’s Office on 10th December 2010that “at the High Risk Corporates Board meeting the previous week a late submission had come in about adeal on which Mr Dave Hartnett had ‘shaken hands’ with Goldman Sachs” and that “the status of this agreementwas not clear”.

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

3.17 Although the C&AG reported that: “these arrangements meant that decisions were taken at the mostsenior level, and relevant technical and legal expertise remained available”, as can be seen from the GoldmanSachs settlement, relevant technical and legal expertise being available does not necessarily mean that theCommissioner(s) negotiating the settlement obtained it at the appropriate time, or at all. Indeed, the mere factthat HMRC employs about 250 lawyers and many more technical specialists means that relevant technical andlegal expertise remains available at any point in time. The question is whether relevant technical and legalexpertise 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 fourbiggest cases that were not referred to the Programme Board, which presumably includes the Vodafonesettlement 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 16March 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 inour organisation, the director of our international division and one of her deputies, and our lawyers wereinvolved throughout. ...

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

Dave Hartnett: The director of our international division and her deputy began a negotiation withVodafone and their advisors. When that stalled, I and another commissioner in HMRC became involvedand 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, itwas 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 thiskind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts inthe 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 involvedas well.

C&AG’s Conclusions

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

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

— statutory requirements, for example, the provisions for the exercise by the Commissioners oftheir discretion under their statutory ‘collection and management’ powers. [TheCommissioners have a limited discretion with regard to their duty for the collection andmanagement of taxes under Section 5 of the Commissioners for Revenue and Customs Act2005. In certain limited circumstances, they can forego the collection of tax, for example ifthere 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 thecircumstances 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 furtherthree [Four of the cases not referred to the Programme Board for a decision were those subject to thespecial governance arrangements noted in paragraph 2.28.] were presented to the Programme Board for adecision. 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 toselect the largest issues by value, irrespective of the type of tax involved. We selected our sample toinclude issues where a large amount of tax was under consideration, even if the final settlement value wassmall. 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 thedispute resolution.

Collection and management powers

2.35 Our review identified a number of cases where the Commissioners had been asked to exercise powersavailable to them under Section 5 of the Commissioners for Revenue and Customs Act 2005 to foregothe 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 Wilkinsonjudgement on the Commissioners’ ability to exercise these powers to resolve tax disputes. If theCommissioners 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 andmanagement powers on the basis of oral advice from the Department’s Solicitor’s Office. In our view, inthe particular circumstances of this case, it would have been helpful to have secured confirmation of thatadvice 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 internalguidelines for managing cases in a substantial majority of the cases we examined. Technical and legalexpertise was sought and received as appropriate and the available documentation indicated that individualissues had been considered on their merits. We did, however, note exceptions in the following cases whichwere 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 theProgramme Board. The Board identified a financial error, demonstrating its value as a checkon settlement proposals.

— A case where the Department came under pressure from a company to agree a settlement ona single issue very quickly. The Department judged that it should not wait until the nextmonthly Programme Board meeting, so the proposed settlement was put to the ProgrammeBoard by email and Board members were given a week to respond. The settlement proposalwas 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 withinan accelerated timeframe. However, there is a risk that the pressure to reach resolution quickly will be atthe expense of considering issues properly. There is also a risk that, in settling a range of issues in a shorttimeframe, weaker issues will be dropped in the wider interest of obtaining a settlement, where they mighthave 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 theLitigation and Settlement Strategy, the Department accepts that it could be more explicit in describing thecriteria used to make marginal decisions.

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

3.21 The scope of the Commissioners’ powers under section 5 of the CRCA 2005 (then under section 1 ofthe Taxes Management Act 1970 and section 1 of the Inland Revenue Regulation Act 1890) was directly inissue 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 tothe tune of some £1 million a year by casual workers employed in Fleet Street, a substantial number of whomhad been drawing their pay under false names such as “Mickie Mouse of Sunset Boulevard” and “Sir GordonRichards of Tattenham Corner”. The Commissioners then made an agreement with the employers and theunions in March 1979, which would enable them to collect tax in the future. However, in achieving this, theyagreed that they would not attempt to pursue those who had evaded taxes in the past. The Federation soughtto 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-quotedstatement (at pages 163–164):

[T]he Board are charged by statute with the care, management and collection on behalf of the Crown ofincome tax, corporation tax and capital gains tax. In the exercise of these functions the Board have a widemanagerial discretion as to the best means of obtaining for the national exchequer from the taxescommitted to their charge, the highest net return that is practicable having regard to the staff available tothem and the cost of collection. The Board and the inspectors and collectors who act under their directionsare under a statutory duty of confidentiality with respect to information about individual taxpayers’ affairsthat has been obtained in the course of their duties in making assessments and collecting the taxes; andthis imposes a limitation on their managerial discretion. I do not doubt, however, and I do not understandany of your Lordships to doubt, that if it were established that the Board were proposing to exercise or torefrain from exercising its powers not for reasons of “good management” but for some extraneous orulterior reason, that action or inaction of the Board would be ultra vires and would be a proper matter forjudicial 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 adifferent exercise of the Commissioners collection and management powers known as Extra-StatutoryConcessions (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 whichthey would not be entitled under the strict letter of the law. Most concessions are made to deal with whatare, on the whole, minor or transitory anomalies under the legislation and to meet cases of hardship at themargins of the code where a statutory remedy would be difficult to devise or would run to a length outof 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 aparticular case there may be special circumstances which will need to be taken into account in consideringthe application of the concession. A concession will not be given in any case where an attempt is madeto use it for tax avoidance.

3.24 Despite this difference between ESCs (which are published and available to any qualifying member ofthe general body of taxpayers) and a private negotiated settlement (such as the one in the Fleet Street Casualscase and in the cases examined by the C&AG), both the Court of Appeal and the House of Lords endorsed theprinciple 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 theCommissioners is to recover those taxes which Parliament has decreed shall be paid. Section 1 of the1970 Act permits the Commissioners to set about this task pragmatically and to have regard to principlesof good management. Concessions can be made where those will facilitate the overall task of taxcollection. We draw attention, however, to Lord Diplock’s statement that the Commissioners’ managerialdiscretion is as to the best manner of obtaining for the national exchequer the highest net return thatis practicable.

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



3.25 When the case came before the House of Lords, Lord Hoffmann remarked (at page 114) that “on thispoint the judgment of the Court of Appeal is in my opinion unanswerable”. He further pointed out that “theCommissioners are not ‘the Crown’, owners of the consolidated fund and able to deal with its property likeany other owner”. After quoting Lord Diplock’s description of the Revenue’s discretion in the Fleet StreetCasuals 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 inwhich a statutory rule is difficult to formulate or its enactment would take up a disproportionate amountof Parliamentary time. The Commissioners publish extra-statutory concessions for the guidance of thepublic and Miss Rose drew attention to some which she said went beyond mere management of theefficient collection of the revenue. I express no view on whether she is right about this, but if she is, itmeans that the Commissioners may have exceeded their powers under s 1 of TMA. It does not justifyconstruing 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 pragmatismin 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 2008provided an enabling power allowing the tax treatment afforded by existing published concessions (thosegranted before 21 July 2008) to be given statutory effect. A consultation process was undertaken in 2009 andthe ESCs were updated by HMRC in 2009. Most ESCs have continued in their current form, as they are withinthe scope of HMRC’s collection and management powers. However, where an existing concession exceeds thescope of HMRC’s administrative discretion, as clarified in the Wilkinson case, such concession will be put ontoa legislative basis as appropriate.

3.27 It should however be emphasised that the Wilkinson case did not affect the settled principle relating tothe negotiated settlements with individual taxpayers as established in the Fleet Street Casuals case. Thereforeit is curious that the C&AG reported “some differences of view within the Department on the implications ofthe Wilkinson judgement on the Commissioners’ ability to exercise these powers to resolve tax disputes”. TheWilkinson judgment has no significant implication on the Commissioners’ ability to exercise their collectionand management powers to resolve the tax disputes examined by the C&AG. The duty of the Commissionersremains as set out by Lord Diplock in 1981 in the Fleet Street Casuals case, namely: to exercise their powerto forego the collection of tax for reasons of “good management” only rather than for some extraneous orulterior 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 RevenueCommissioners) [2004] STC 1703, the Court of Session of Scotland held that an agreement in respect offorward payments was ultra vires. Therefore, HMRC did not act unfairly in terminating it; according to LordCullen, “There can be no legitimate expectation that a public body will continue to implement an agreementwhen 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 Diplockdeveloped the three classic grounds for the judicial review of administrative decisions, which theCommissioners 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] thatthe decision-maker must understand correctly the law that regulates his decision-making power and must giveeffect to it”. Secondly, it must not be irrational. In the words of Lord Diplock (at page 410) this means “adecision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible personwho had applied his mind to the question to be decided could have arrived at it”. Finally, proceduralimpropriety. He explained (at page 411) that: “susceptibility to judicial review under this head covers alsofailure ... 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 implicationsof 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 theSenior Management Team (SMT) of HMRC’s Solicitors Office is a tax lawyer. In view of the fact that theselawyers are most likely to provide “informal” advice to the Commissioners, the C&AG’s identification (fromthe relatively small sample of cases they examined) of a case in which “Commissioners had been asked toexercise their collection and management powers on the basis of oral advice from the Department’s Solicitor’sOffice” 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”, theexercise of the Commissioners’ power to forego the collection of tax on the basis of oral advice from theSolicitor’s Office raises a real issue as to whether the discretion was exercised for “good management” or “forsome extraneous or ulterior reason”. It is difficult to imagine a situation in which an oral advice would havebeen appropriate, let alone in circumstances in which the C&AG himself found that “it would have beenhelpful to have secured confirmation of that advice in writing to provide a clearer audit trail”. Therefore, thereappear 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 conclusionthat he “did not identify any instances where these powers were exercised inappropriately” appears to lack thecredibility the public would expect from his good offices. Indeed, that conclusion itself is arguably susceptibleto 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 andAccountability

Introduction

4.1 As an elected assembly whose members serve as the chosen representatives of the people, the House ofCommons exercises the power to impose taxes and duties upon the people and to vote money for publicservices. The exercise of this power gives to the Commons the chief authority in the State. Select Committeesare appointed by the House to perform a variety of functions, generally of inquiry, investigation and scrutinyand they report their findings and recommendations to the House. Most House of Commons Select Committeeshave a continuing existence and their terms of reference and powers are laid down in Standing Orders of theHouse. Thus the PAC is appointed by the House to examine “the accounts showing the appropriation of thesums granted to Parliament to meet the public expenditure, and of such other accounts laid before Parliamentas the Committee may think fit” (Standing Order No 148). The Committee focuses on value-for-money criteriawhich are based on economy, effectiveness and efficiency. On the other hand, the TSC is appointed by theHouse 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” relevantto their terms of reference. The issue of an order for an individual to attend or to provide evidence can exercisethese powers, formally. However, the general practice of select committees is to request witnesses to giveevidence to them by means of an informal invitation issued through their clerks of the chairman of thecommittee. Select committees seldom use their formal powers to summon individuals, preferring to keep themin reserve. Select Committees’ own deliberations are held in closed session but Committees usually admit thepublic and the press to hearings at which they take evidence from witnesses. Committees may, on request froma 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 toResolution to the following effect:

That, in the opinion of this House, the following principles should govern the conduct of ministersof the Crown in relation to Parliament: ministers have a duty to Parliament to account, and be heldto account, for policies, decisions and actions of their departments ...; it is of paramount importancethat ministers give accurate and truthful information to Parliament, correcting any inadvertent errorat the earliest opportunity. Ministers who knowingly mislead Parliament will be expected to offertheir 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, whichshould be decided in accordance with relevant statute, and the government’s Code of Practice onAccess to Governmental Information (second edition, January 1997) [from 1 January 2005 theFreedom of Information Act 2000 ]; similarly, ministers should require civil servants who giveevidence before parliamentary committees on their behalf and under their directions to be as helpfulas possible in providing accurate, truthful and full information, in accordance with the duties andresponsibilities 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 toParliament as Ministers in charge of Ministerial departments. This is in addition to the Commissioners’ basicaccountabilities to Ministers and to the public. According to the authoritative Erskine May’s treatise on thelaw, privileges, proceedings and usage of Parliament11 a witness is bound to provide all information anddocuments requested by a Select Committee even where there would be an excuse in a court of law. If witnessesare bound to disclose any information which a Select Committee sees fit to request of them even where suchdisclosure would ordinarily be prohibited by law, it is remarkable that HMRC’s officials have refused todisclose information requested by the PAC and the TSC despite the absence of any legal prohibition fromsuch 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 casereferred to above. In support of their case, the Federation had sought to get the Inland Revenue to disclosetheir papers relating to the special arrangement with the casual workers, especially as to the negotiations withthe unions and the employers. The Revenue argued that taxpayer confidentiality would be breached if theFederation was granted leave to bring a judicial review and maintained that the Department’s statutory duty ofconfidentiality indicated that the legislation imposed no duty owed to a taxpayer (or the general body oftaxpayers) in respect of the collection of taxes due from another taxpayer.11 23rd Edition, pages 650–651.



4.6 However, the issue of taxpayer confidentiality should not have been raised by the Inland Revenue in thatcase as a defence to the Federation’s claim. As Lord Diplock indicated in his speech referred to above, theRevenue 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 statutoryduty to preserve the confidentiality of information obtained by its inspectors and collectors aboutindividual taxpayers’ affairs, since ex hypothesi the members of this class of taxpayers had made noreturns 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 legitimateobjection could have been taken to discovery of documents relevant to the making of the specialarrangement. Such documents would be unlikely to contain any information about the affairs of any FleetStreet casual who had succeeded by various devices in avoiding his identity being discovered by thesearches of the Revenue”.

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

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

“9. Select Committees have a crucial role in ensuring the full and proper accountability of the Executiveto 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 Committeeinquiries. In giving evidence to Select Committees, officials should take care to ensure that no informationis withheld which would not be exempted if a parallel request were made under the Freedom ofInformation Act”. (emphasis supplied)

4.10 Surely, it could not have been the intention of Parliament that information that would be disclosed toanybody, anywhere in the world under the FOIA would be withheld from the Select Committees of the Houseof 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 bedisclosed to Parliament and to the public where the public interest in transparency and accountability requiresthis. In the words of Lord Scarman (at 178): “the duty of confidence can co-exist with the duty of fairnessowed 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 thepurposes of improving the accountability and transparency of the settlement of large and complex tax cases byHMRC. Similarly, section 18 of the CRCA authorises the Commissioners and their staff in HMRC to discloseinformation (including taxpayer confidential information and HMRC’s official secrets) to Parliament and thepublic for the purposes of improving the accountability and transparency of the settlement of large and complextax 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 isthat confidentiality should not stand in the way of an HMRC officer performing an HMRC duty orfunction. If you need to disclose information held by HMRC in order to carry out a function of HMRCthen 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 holdpoliticians 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; themoney it spends, where it spends it, the results it achieves; how so much of it is locked away in a vaultmarked 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’regoing to rip off that cloak of secrecy and extend transparency as far and as wide as possible. By bringinginformation 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” approvedby ExCom “to encourage all staff to deal with information as openly as they can—in both dealing with FOIrequests 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 ofserving the public. In both internal and external communications it is important we are open about the waywe work, the information we hold, and how we take decisions. Staff should always try to communicate inplain language and release information in an accurate and timely fashion, making full use of the Internetto publicise our role and achievements. Being open with information will enhance our relationship withstakeholders and help maintain the public’s trust in HMRC”.

4.16 Against this background HMRC has a long-established practice of issuing graphic press releasescontaining 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 recentBBC documentary—Saints and Scroungers—in which a presenter followed “fraud officers as they bust thebenefits thieves stealing millions of pounds every year”. It is pertinent to note that the general duty ofconfidentiality under section 18(1) of CRCA applies to any information held by HMRC in connection with anyof 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 confidentialityunder section 18(1) a specific gateway is required to issue these press releases lawfully. HMRC applies section18(2)(a) of CRCA which permits a disclosure made for the purposes of its function. The Commissionersconsider that the duties of transparency and accountability HMRC owes to the general body of taxpayersoverride 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 familylife under Human Rights legislation. In particular, the policy objectives of this measure go beyond deterrenceand include the provision of visible assurance to the majority of taxpayers who play by the rules that HMRCis 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 thedisclosure of information about corporate customers involved in controversial settlements to Select Committeesof 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 largesums of money are being settled correctly. However, in recent evidence and submissions to the PAC and theTSC, senior officials of HMRC have consistently refused to disclose information needed to assure Parliamentand the public that due process in the discharge of the Department’s collection and management functions isbeing 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 businessCorporation Tax (HC 614), Mr Hartnett (then Acting Chairman of HMRC) and other officials gave oralevidence. 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 welook at paragraph 2.7 which relates to figure five, I was quite surprised to read, Mr Hartnett, that 58% ofopen inquiries involve cases where the tax under consideration is less than £500,000. So you have got58% of your inquiries generating only 1% additional Corporation Tax. Do you really have a grip onthis tax?

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

Ms Dawes: Since February, when the Report was written and that figure was produced, we have cut thenumber of issues for less than £500,000 by 55%. What we have also done is introduce a more roundedmeasure of a small issue that takes into account not just the monetary amount but also looks at theprobability of success and the impact on the wider tax system. We have set ourselves a target for that inthis financial year of cutting those small issues by 75% and so far we have achieved a 70% reduction inthe 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 andletting the big fish get away?

Mr Hartnett: Absolutely not, Chairman. Some of the big fish are very big indeed. We have applied a lotmore resource to those, taking a taskforce approach to the biggest risks, recently applying more than 150of 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. Ifwe look at 1.12 what we see there is a third of large businesses pay no Corporation Tax at all. That isextraordinary. Do you think that members of the public, if they were watching this, would find thatvery 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 activitybehind it, so there are many large businesses which have very little economic activity to be taxed in theUK. Nearly 38% of the activity of UK quoted groups happens abroad and much of the profit will be taxedabroad. Some great UK corporations have very substantial accumulated losses. Some industries inparticular have a lot of losses brought forward from the late 1990s, and I am thinking of telecoms andmanufacturing. 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 avoidanceplays 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 taxavoidance: “Our consultation with large businesses indicated that they felt there was a widening gapbetween the skill set of their tax department staff and that of the Large Business Service”. Could it bethat 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 theintroduction of tax disclosure rules in 2004 and with Government having closed a great number of taxavoidance schemes, what we are learning from both business and their advisers is that marketing schemesare substantially in the past, although clearly not entirely. We are seeing fewer disclosed and we test tomake sure disclosure is made. I think we have been very effective in countering avoidance. Am Icomplacent, 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 aresupposed to pay and what they do pay? The technical term is tax gap but, to put it in a way that ordinarypeople 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 lessconfident about is how to measure it but there are broadly two approaches. We can have a bottom-upapproach through random inquiries, a tried and tested method that we used for direct access with smallbusiness, but which works much less well with big business, and we can have a top-down approachthrough 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 thatCorporation 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 billionis tax at risk which may be on technical issues, may be cross-border issues. I am afraid I cannot tell yousat 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 theselarge companies had to publish in their accounts what profits they are making and what tax they arepaying?

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 workout roughly what tax is paid against what profits, but the big challenge in the UK compared with, say, theUnited States, Australia and some other countries, is that we do not have a consolidation for tax purposesin 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 havefound 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 Comptrollerand 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 TheGuardian 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 didgive some response as to why that should be the case but can you give us a list of the 200 companieswhich 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 makeany 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 successfullyapplied 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 taxavoidance 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 aboutindividual companies where we have a duty of confidentiality and I would be very concerned indeed, MrTouhig, 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: “Taxavoidance is not easily definable but it can involve highly creative ways of using tax laws to reduce ordefer 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 companyin 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 ofconfidentiality.

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 publicdomain. It is not just about naming and shaming, it is ensuring that there is public discussion about somevery large companies that are not paying tax and you sheltering behind this blanket of confidentiality. Iwant you to think very carefully in the answers you give to Mr Touhig whether you cannot be rather morehelpful 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 ifwe need further correspondence we can do so, but I do think it is in the public interest that we shouldknow this.

Mr Hartnett: Certainly, Mr Touhig.

4.20 Mr Hartnett is well aware that the same legal considerations the Commissioners apply to the publicationof information about HMRC’s customers involved in tax offences also apply to the information requested bythe PAC on this occasion because both sets of information are available in the public domain. In fact, heexplained in that exchange [Q13 and Q14] that much of the information requested was available in the publicdomain—“it is there for many of them already ... you can look at the published accounts, you can look at thetax account and you can work out roughly what tax is paid against what profits”. Yet the Department refusedto 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 on28th January 2009 on the C&AG’s report HMRC: Management of tax debt (HC 1152) the PAC appeared tohave 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 taxand we were told that because of data protection we could not be told, but one hears all sorts of storiesabout 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 companiesby turnover and the liability and the ones that you are having persistent problems with. I am sure you willnot 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 includingthe Chief Executive Ms Lesley Strathie and Ms Melanie Dawes, then Acting Director General Business Taxgave the following evidence:

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

Ms Dawes: We try to focus on all sizes of business and we actually have very high staff ratios for thelarge businesses, with just under 100 staff looking after only 650 customers, accounting for about half oftrade by value from outside the EU. We actually try to adopt quite a balanced approach and if anythingput 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 largebusinesses has decreased by 67% in real terms” and then in paragraph 13 it mentions that the proportionof audits identifying irregularities in smaller businesses has obviously gone up and the amount you aregetting 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 wereincluded in the figures for 2006 and if you take those out the reduction in yield from audits from the largebusiness 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 Iunderstand it, errors were made and where we recently settled quite a large set of issues over a numberof 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 todo 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 largeamounts of money. From the nature of these companies they are accounting for very large amounts oftrade and large amounts of duty and so when we have an individual issue with one company it can havea big impact on the figures. I was really just trying to explain that if you take those impacts out there isa 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 givethem 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 wehave probably had with you before.

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

Ms Strathie: I think you know we are bound by taxpayer confidentiality and you did point out earlierthat 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 refusingpoint blank to give us this information?

Ms Strathie: That is our position because of taxpayer confidentiality. I know that you often receiveinformation 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 taxaffairs 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 theletter (copied to Ms Strathie), Mr Leigh contended that the PAC was entitled to information about identifiedtaxpayers for the purposes of its proceedings; that witnesses providing such information would be protectedby 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 didduring the examination referred to above, Mr Leigh suggested that the PAC would be willing to take suchevidence in private session.

4.24 The issue was discussed within HMRC and in June 2009, Mr Hartnett approved a memorandumrequesting ExCom to maintain the policy of not disclosing identifiable taxpayer information to the PAC. Thememo, which provides a useful insight into the modus operandi of Mr Hartnett’s powers (both in regard to theexercise 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, unlessthe 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 pointsraised by Edward Leigh. A draft letter is attached;

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

Author: [Information Policy Officials]

Signed Off by: Dave HartnettSummary:

Edward Leigh, Chairman of PAC, has written to Gus O’Donnell challenging HMRC’s refusal to discloseidentifiable taxpayer information to the Committee. We have taken legal advice and considered the risksand possible consequences of such disclosure. We recommend that we maintain the Departmental policyof only disclosing such information where Commissioners are agreed that it is strictly necessary for thedepartment’s functions. This would require very exceptional circumstances which are not present in theparticular case which gave rise to Edward Leigh’s letter. We attach a draft letter to Gus O’Donnellsuggesting 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 Parliamentin early 2005, both the Lords and the Commons were concerned to ensure that taxpayer confidentialitywould not be compromised by the merger. Reflecting these concerns, Government Ministers gave clearcommitments that taxpayer confidentiality would not be watered down or eroded. HMRC has a statutoryduty of confidentiality protecting customer information and a criminal sanction for the wrongful disclosureof such information.

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

Options considered:

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

5. Section 18 of the CRCA prohibits the disclosure of information held by HMRC unless for specifiedexceptions. In the current case, the only exception is that permitting disclosure for the purpose of afunction. It is difficult to identify an example where it would be necessary for HMRC’s functions todisclose 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 aParliamentary body with an oversight role over HMRC it follows that HMRC’s functions would extendto 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 viewthat Parliamentary privilege would be unlikely to provide protection to an HMRC official charged withsuch an offence, because the offence is one of strict liability and as such it would only be necessary togive 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 anyassurances by PAC of keeping information confidential would not be enforceable by HMRC. We wouldbe right to assume that information we provide as evidence to PAC would in all likelihood become publicin one way or another. There are also Human Rights Act and Data Protection Act considerations thatcould make the disclosures very risky. Counsel advised therefore that it was legitimate to take a cautiousand 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 todecide 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 dutyof confidentiality and being subjected to criminal proceedings for wrongful disclosure.

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

This would be a particularly retrograde step in the context of our work with large corporates. Thisbreakdown of trust would create a risk to the operation of the tax system which relies on ourcustomers providing real time information to us and could have a detrimental effect on the taxyield we collect. Our confidentiality rules have meant that we have to legislate even to enable usto 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 withour taxpayers were we to give such information. Other countries have the same approach wehave of not providing this to Parliament, except those countries where a democratic system isnot upheld.

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

(c) Damaging effect on Ministers. Our relationship with Ministers has always been an arm’s lengthone, and consequently they are told very little about individual taxpayers. By and large Ministershave recognised that it is in their interests not to receive taxpayer information as it distances themfrom particular cases and protects them from accusations of political interference. If we were toprovide taxpayer information to the PAC it could not be withheld from Ministers, who couldthereby be drawn into areas they wish to avoid. If there were any possibility of changing ourcurrent 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 operatestrict rules in disclosing information to other government departments and agencies. SuccessiveMinisters have insisted upon legal provisions (statutory gateways) being established in line withthe policy principles for the supply of HMRC data which provide clarity about the type ofinformation to be disclosed and a criminal sanction for wrongful disclosure by the recipient. Wehave upheld these principles for some time, often against strong opposition. Although disclosureto the PAC (as a Parliamentary oversight body) would be fundamentally different, any change toour stance on confidentiality risks undermining our position and coming under greater pressure todisclose customer information to others without those safeguard.

(e) Damaging effect on our reputation. Disclosure to the PAC would erode our integrity onconfidentiality. Disclosing taxpayer information to a third party who may at times have politicalreasons for asking for the information risks undermining our reputation for impartiality. Ourreputation 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 recenttimes as the public perceive that Government action leads to more undermining of personalprivacy. Such lobby groups could be expected to raise considerable concerns about erosion of ourtraditional approach to maintaining taxpayer confidentiality.

(f) Attitude of Parliament. It is risky to assume that Parliament as a whole (as opposed to the PAC orits chairman) would support the disclosure of taxpayer specific information to the PAC. Parliamenthas 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 eventsaround expenses will have made Parliament more wary of situations in which the tax affairs ofindividuals 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 thedraft letter to Gus O’Donnell to allow him to reply to Edward Leigh before Summer Recess begins on21 July.

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

4.26 Furthermore, it is conceded in the memo that the legal advice from First Treasury Counsel stated thatHMRC’s functions extends to assisting the PAC with that oversight role such that relevant information can bedisclosed to it by virtue of section 18 of the CRCA. However, the draft letter enclosed to the note (suggestinghow 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 MPThank you for your letter dated 25 March 2009, copied to Lesley Strathie. I understand that the informationto which you refer is information in respect of named or identifiable taxpayers. She and I have consideredthe 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, thedepartment is subject to statutory constraints on disclosure of taxpayer information which were approvedby Parliament as recently as 2005 when the CRCA was passed enabling the merger of the Inland Revenueand HM Customs and Excise. Both Houses of Parliament were very concerned to ensure that the dutyand tradition of keeping personal tax information confidential should not be eroded as a result of theformation of the new department.

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

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

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

Within these constraints, HMRC seeks to ensure that the PAC has the information and evidence it needsto carry out its role, on behalf of Parliament and the taxpayer, of scrutinising and holding the departmentaccountable. In order to be as helpful as possible, HMRC officials will continue to provide information tothe 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 tryand meet any residual concerns Members may have in a way that does not undermine HMRC’scommitment to taxpayer confidentiality, or breach its statutory obligations, including asking taxpayers fortheir consent to disclosure where appropriate. I would commend to you this pragmatic approach, respectingthe law and the PAC’s position and, at the same time, honouring HMRC’s responsibilities to its employeesand the public.

I hope that you and the Committee will understand HMRC’s reasons for seeking to provide informationrequested 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 butthis 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) permitsdisclosures of information in six sets of specified circumstances such as preventing or detecting crime, nationalsecurity, public safety, public health and the regulation of professions. The purpose of the provision is toprovide explicit statutory cover for disclosures that were previously made by HM Customs and Excise in thepublic interest on the basis of implied.12 Thus a disclosure to the PAC would not come within the six sets ofcircumstances specified in section 20 but, as counsel advised, section 18(2)(a) of the CRCA authorises HMRCto 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 beliable to criminal prosecution if they breached their duty of confidentiality” and stated that “parliamentaryprivilege would not necessarily offer protection, as the offence is one of strict liability and as such it wouldonly be necessary to give evidence of the fact of disclosure, not the content”. However, where a legal basis fordisclosure exists (as in the case of a disclosure to Select Committees under section 18(2)(a) of CRCA), thegeneral prohibition under section 18(1) will not apply, and following from this the criminal sanction undersection 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 SelectCommittee is highly improbable. First, as explained in greater detail in the attached paper, the criminal sanctionunder section 19 CRCA applies to wrongful disclosure of taxpayer confidential information but not to HMRC’sofficial secrets, which the PAC requested. Secondly, section 19(3) provides a defence for a person charged withthe 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 Directorof Revenue and Customs Prosecutions or with the consent of the Director of Public Prosecutions and inNorthern Ireland only by the Commissioners themselves or with the consent of the Director of PublicProsecutions for Northern Ireland.

4.31 In fact, there are no records of a prosecution for wrongful disclosure of tax information in the last 100years because known breaches of confidentiality and official secrecy have either involved other elements ofcriminality (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’sbusiness” and as the Principal Accounting Officer “is accountable to Parliament for the Department’sperformance” (or any other official acting on her behalf) for disclosing information to the PAC is so remotethat 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 providedto the PAC in confidence if HMRC could not do so in public session. This request was declined. Thisopportunity for confidential disclosure was also spurned in the draft letter. However, the Cabinet Officeguidance—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 Committeesand emphasises that the presumption is that requests for information from Select Committees will be agreedto. If the problem lies with disclosing information in open evidence sessions or in memoranda submitted forpublication, it requires Departments to consider whether the information requested could be provided on aconfidential basis. These procedures for providing sensitive information in confidence states, amongst otherthings, that:

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

12 See the Joint Committee On Human Rights Thirteenth Report.



86. When this arises, the Department should inform the Clerk that the information in question can bemade available only on this basis, explaining the reasons in general terms. Such information should notbe made available until the Committee has agreed to handle it appropriately, either by treating it whollyin confidence or by agreeing to publish it with a reasonable degree of sidelining (ie with the relevantpassages omitted but with the location of the omissions indicated). It is important when submitting suchinformation 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, andtherefore will be exempt from release under FOI, but they will eventually be considered for release underthe 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 ornot, 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) containedthe following recommendations:

Clearer accountability to Parliament

6.37 For Parliament, there would be better clarity about who should be held accountable for whichdecision. 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 appearbefore the Treasury Select Committee (and other Select Committees as necessary) to account for decisionsthat his or her department has taken in exercise of their statutory duties, and for progress in achieving thePSA objectives and targets and Remits set for the Executive Chairman by the Chancellor. Ministers andTreasury 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’sresponsibility.

6.40 As at present, there will be a Departmental Report presented to Parliament in the spring. The newdepartment will also produce an annual report to Parliament, published in line with Government reportingrequirements and timetables. As at present, the Executive Chairman will also be responsible for makinga Trust Statement to Parliament, accounting for revenue collected, remitted and written off, and anynecessary 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 itscustomers—taxpayers, tax credit recipients, the travelling public, and others. The new department will bemore focussed on its customers because:

— it should be more clearly established who is accountable to whom, for what, so taxpayers willhave 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 forthe front-line to tailor services to meet customer needs. ...

— more performance data should be in the public domain, giving citizens more scope to exercisetheir 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 aboutthe performance of different parts of the taxation system, allowing citizens to hold it to account, and inparticular to judge when service standard commitments are not being met. It is already possible, forexample, to see the performance of Inland Revenue Enquiry Centres on the Internet. The experience ofother public sector organisations is that transparency helps to drive performance improvements, to someextent 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 controversialVodafone settlement and the dogged refusal by senior HMRC officials to provide information required to assureParliament and the public that due process was followed in that case, purportedly for reasons of taxpayerconfidentiality. The hearing before the Committee of Public Accounts on 16th November 2010 (Public AccountsCommittee—Eighteenth Report HM Revenue and Customs’ 2009—10 Accounts) is very instructive and is setout 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 personaltax information confidential, but the tax affairs of companies, particularly publicly quoted companies, areavailable, one assumes, to their shareholders. I therefore have a slight question about why we cannotdiscuss them here. It is a question of principle. I am not trying to trip you up on this one, Lesley. I canunderstand that you don’t want to talk about my tax affairs to the Committee, but I cannot understand whywe 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 liabilitiesand to bring tax in. It is for the companies themselves to discuss whatever they choose to discuss, but itis 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 totheir shareholders what the number in their accounts was?

Q194. Mr Bacon: In the case of Vodafone, it disclosed to its shareholders that following the agreementthat it had reached with HMRC it was not expecting to be affected into the future by tax in the particularmatter 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 uspermission 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, giventhat we’re running out of time.

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

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

Q195. Chris Heaton-Harris: I was wondering whether you could extrapolate “crystallised liability” forme. I thought that if you were a corporation and you did something that was liable for tax you’d probablyend up paying it. So, is it just an aspiration of HRMC to get that tax? Do you immediately start in anegotiating 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 ofAppeal decision last year confirming the compatibility of a controlled foreign company’s rules with EUlaw was an important success for HMRC. It paved the way for the settlement—that was the point that Iwas 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 knowhow 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’regoing 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 benegotiating outside litigation. How many companies are there that HMRC views at present as owing morethan £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 tostart 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 millionthat 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 theinformation that we can in terms of litigation strategy and the cases that we have in the pipeline. We’llgive 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 leftHMRC in 2007 should, within a couple of years, be negotiating with an ex-colleague to settle a disputeabout 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 mattersand 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 dealtwith 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 lotabout it either. I just read what I read in the press. What hit me in the face was that in my view it iscompletely inappropriate to have a negotiation of quite a sizeable potential outstanding debt betweensomebody who was working for HMRC, who has now gone to work for the company, negotiating withan 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. Ican’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 thatthere might be a case for qualifying on grounds of irregularity if it was seen that a decision had beenmade unreasonably. I did warn that I thought that that wasn’t very likely. I think I am repeating myselffairly accurately. Thank you.

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

Your own controlled foreign corporation specialists believed in the case of Vodafone that the absoluteminimum that HMRC should settle for was £2.4 billion. You have referred a number of times to the issueof process. The process that concerns me and may concern others is that, instead of the HMRC’s specialistin controlled foreign corporation law being consulted on the terms of a deal, it is done in private betweenyour 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 advicefrom within HMRC, from those who knew about the details of controlled foreign corporation law wastaken. 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’tbelieve that any decision was taken in private. There comes a point when the commissioners have todecide what the right course of action is in the circumstances that they are in. The director general forbusiness tax was the accountable commissioner in the first instance here, and the business tax seniormanagement 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 permanentsecretary 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 iswhether the people who knew what they were talking about with HMRC were consulted on the terms ofthe deal. That is a process point. It is a fact that the people who knew what they were talking about werenot 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 ahuge tendency when people have worked on something for a very long time to hope that they will finallyhave their day in court. There are many cases that have gone back for years and years, where they havestill 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 onavoidance cases, “If our legal advice is strong, do not accept settlements for less than 100% of the taxand interest due”.

Dame Lesley Strathie: But wouldn’t that suggest to you that there was a number that was the tax liabilitydue? That’s the last word that I’m going to say on the subject, or I am absolutely in danger of breakingtaxpayer 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 thatyou 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. Whoauthorises such arrangements, especially the ones that fall between the public assessment, if you like, orthe clear assessment that the staff would make, and litigation? In other words, what about those cases thatfall in between? Incidentally, the Chair was asking for some data. I think it would be important to try anddivide that between those cases greater than £250 million, where we think that there is litigation, andthose 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 ordown? 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 considerableamount 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 aboutthis 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 settlementwas made?

Dame Lesley Strathie: I wouldn’t use those words. If we are having a hypothetical case, then you arestriving 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 aresettled differently? What Mr Bacon read out is the process—it is the liability or it is litigation. Is thatthe 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 ispretty unforgiving when it comes to smaller organisations and companies in pulling back tax or nationalinsurance.

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 hugeamount of our work is in nailing down what we believe the law was intended to do and what applies forthe 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 dealingwith 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 withHMRC in how they pay back money?

Dame Lesley Strathie: We have absolutely proven, with the introduction of the business payment supportservice during the recession, that provided people came to us and told us that they had a difficulty, wewould 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 allowedmany more companies to come into a compliance regime and be given time to pay. The return on thathas 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, justbecause they’re a large corporate, has the opportunity to come to an arrangement so far as liability isconcerned. 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 arrangementscovering £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 £6.4billion. They have time to pay, but we are also collecting in excess of 90% of that at the current rate. Iam 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 ofAppeal case that helped you in that. My belief is that having got that case on your side, you did notpursue 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 thanyou 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 infuture, 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 tovary 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 inRevenue and Customs, and they cover different areas, but on any decision there will be a minimum oftwo commissioners. We will ensure independence and governance of that. I would never personally beinvolved 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 howaccountability works and the role of the accounting officer. I want to clarify whether, as the accountableofficer, you have to agree to variations.

Dame Lesley Strathie: My job as principal accounting officer is to account for decisions that are madeand 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 beself-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 tooversee that process also. I expect anyone in the permanent secretary or tax line to be working with theNAO on any of our approaches for that. In an organisation the size of mine, I can’t do everythingpersonally.

Q226. Stephen Barclay: I appreciate that. One final thing. In terms of these firms always being majoremployers, one would understand there being other factors considered in terms of whether to pursue anaggressive 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 otherfactors?

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 ismade with the consent of each person to whom the information relates but as Ms Strathie is fully aware, section18(2)(a) equally permits a disclosure which is made for the purposes of a function of HMRC. Clearly, adisclosure of information by HMRC’s Chief Executive qualifies as a disclosure for the purposes of a functionof 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 Freedomof 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 toSelect Committees. Officials should be as forthcoming as they can in providing information, whether inwriting or in oral evidence, to a Select Committee. Any withholding of information should be decided inaccordance with the law and care should be taken to ensure that no information is withheld which wouldnot 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 beenaware that HMRC can disclose information lawfully to relevant Select Committees, suggested that he had onlyjust became aware of that fact. The following exchange with the MP for Hereford and South Herefordshireis instructive:

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

Dave Hartnett: Maybe a little, Mr Norman. Can I preface what I want to say by saying that, beforecoming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayerconfidentiality legal strictures on us, refused to say anything about a particular taxpayer. I thought it mightbe 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 cannotanswer 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 intoaccount in exercising the statutory discretion conferred on the Department under section 18(2)(a) of CRCA todisclose information to the Committee on that occasion.

4.39 The subsequent evidence, much of which has since been contradicted by information available in thepublic 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 Ithought I would construct the £6 billion for you, very quickly—how we think it was constructed and whywe think it is simply wrong.

The profits to which the £6 billion allegedly relates arose in Luxembourg from activities in Germany andGreece. The calculation is based on gross income, not on profit, so the calculation takes no account ofnon-taxable amounts—tax losses, overseas tax paid and all the things you would normally set off ingetting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt atall to analyse the controlled foreign company legislation and look at exemptions. Our view is that the £6billion is frankly—I hope this is not an inappropriate word—absurd, and that no serious or reputablepractising 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 youcan’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 actualliability, which is £1.25 billion. That is the real issue, Mr Norman, about the £6 billion. This is—may Irepeat 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 beenallegations, which we haven’t felt able to counter before, that Mr Connors of Vodafone and I met regularlyand in secret to cook up the deal. At no stage during my involvement with Vodafone did I meet MrConnors. 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 orderto reach that settlement. Not true. We escalated the Vodafone matter to the very best people in ourorganisation, the director of our international division and one of her deputies, and our lawyers wereinvolved throughout.

The third thing worth saying is that I think I have read somewhere that I brought Mr Cruickshank ofDeloitte into the matter. No, not at any stage. Of course I know Mr Cruickshank, he is one of the country’sleading 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 differentmatters, 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? Whatwas the procedure by which you settled the case?

Dave Hartnett: The director of our international division and her deputy began a negotiation withVodafone and their advisors. When that stalled, I and another commissioner in HMRC became involvedand 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, itwas 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. Wehad to balance out whether we were going to get more money for the country by litigating or more moneyby getting the right negotiation, and there were plenty of tax QCs in the UK lined up telling us and themedia 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 takento 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 bigbusiness—about £6.25 billion. I am trying to find a list I have brought because I thought that it might behelpful. 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 manyof 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 thiskind?

Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts inthe 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 involvedas well.

Q164. Jesse Norman: Was there any difference of view as to how the case should be prosecuted asbetween 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 workingon the case but elsewhere in the department—felt that we should have said to everyone in the departmenthow this case was progressing. When you think of the scale of it, this was incredibly market sensitive interms of an amount of money, so we could not explain to large numbers of people how the matter wasbeing 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 failureto charge penalties to big businesses when they understated their tax payable. The number was about £15million 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 thanthat but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure totake reasonable care. Most of the issues we resolve with big business in the UK are very significantdifferences 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 thatwas under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn’tbetter than you promised to do in 2008. It feels a lot worse. What is the equivalent percentage of taxunder declared for small business?



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

Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasionby 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 businessis about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, ifyou 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 underdeclared. 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, orworse, 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 whounderpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see thenumbers on that. Do you think you are offering a credible threat to big business, in line with HMRC’sstated 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 earlieron, over the last four years we have increased that in relation to big business by more than 25%. If I lookat the list of cases we have taken to the Tribunal—this is all public domain information. Firstly, thePrudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we havewon. 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 whetherthere is a penalty position.

If I go back to the £15 million you mentioned earlier on, I happen to know one element of that £15million 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 seniorofficials 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, giventhat 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 necessarywe take legal advice; sometimes external legal advice.

Q173. Jesse Norman: Do you think you have adequate transparency in the derivatives profits made inthe 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 banksthat we drew up. The top 15 banks and another 190, roughly, have now signed up to that. Transparency isa key part of it, and we are monitoring that transparency very carefully. With a number of the biggestbanks we now work in real time.

If I can turn your question ever so slightly; do we necessarily understand all the derivatives? Maybe notas quickly as I would like.

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

Q174. Mr Love: Can I just come back to Vodafone briefly? How would you explain the widespreadreports 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 veryconservative provisioning in relation to tax; very conservative provisioning indeed, where it is massivelymore than the sum of money we could possibly collect under the law. We did not collect a penny lessfrom Vodafone than we thought we could.

Q175. Jesse Norman: That cannot be true because you have already said you negotiated. So you had anambition for how much you wanted to take from Vodafone, which was thwarted by the company and thenyou 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 atthe position; we did our calculations during the negotiation and we reached what we thought was theright 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 viewof 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 aboutwhat their tax liability was?

Dave Hartnett: My experience, Mr Love, is that happens regularly. If I can go to another matter, farenough away, to illustrate the point, I remember that we were pilloried in the media some years ago fornot collecting every penny of tax under a provision. We couldn’t get there. In law we could not reach theprovision. 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 facedwith a tax liability, one would try to be as conservative as possible because what you don’t want is twosurprises: first that you make a provision and secondly, you discover you haven’t put enough aside andthere 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 incompetentthan 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 statementhas 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 absurdfigure, 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 largestever cash settlement.

Q179. Mr Ruffley: You are saying the £6 billion was absurd and you suggested that was because it wasa gross income figure, and did not take account of exemptions under the Act or any other write-offs orlosses, 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 cruelcommentators—that you have sold out to big business. I am not going to be as populist as that, but I have tosay 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 informationto Parliamentary Committees was highlighted at the hearing before the Treasury Sub-Committee on 11 May2011, particularly when the MP for Streatham questioned HMRC’s Acting Director-General for Personal Taxabout the Goldman Sachs settlement:

Q408. Mr Umunna: Minister, before I move to Mr Banyard, because I have a couple of questions abouta case of record, I noticed in the answer that you just gave that you said that you weren’t consulted inrelation to settlements in advance of them being made. Do I take it from that answer that after settlementscome to perhaps the public’s attention, you do then ask questions? There have been a range of writtenquestions 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 toensure that I am comfortable or that we can be comfortable with the position that has been taken withinthe constraints that exist, which are significant. So I have not sat down and had someone talk me throughthe Vodafone settlement, but nonetheless I, as you would expect, I would seek reassurance on thegovernance 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 hasbeen reported, because it was heard in open court, and that relates to Goldman Sachs. For a 26-monthperiod in the late 1990s, that investment bank set up an offshore vehicle to pay bonuses to their Londonbankers, and under the arrangement London staff who were employed by that vehicle were seconded tothe 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 betweenHMRC and Goldmans that started in and around December 2002 and continued through to the end of2009, because HMRC was concerned that this arrangement was being used to avoid the payment ofnational insurance. Now, all that I have just said is a matter of public record and has been heard anddiscussed in open court, and there are various judgments in the interlocutory hearings which have formedparts 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 publicdomain 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 thesettlement terms. I have just asked you about the case so far. Just in terms of the arrangement that wasthe subject of those proceedings, which was an employee benefit trust, those were in operation in a numberof other companies at that time. You, HMRC, also brought proceedings against them in relation to thosearrangements, and again, all of those proceedings are a matter of public record. Now, you will note I havenot mentioned the companies, I have not even cited the proceedings, but you will agree, or perhaps youcould confirm that what I have just said is correct?

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

Q411. Mr Umunna: With respect to those companies, and these were companies with whom you hadsimilar proceedings at around the same time as Goldmans, you successfully litigated those proceedingsand 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 toconfirm 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 theGoldman’s interlocutory hearing I have just referred to—Goldmans refused to play ball over EBTs and sothe proceedings in relation to them carried on for another four or five years. Again, that is all a matter ofpublic 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 insurancecontributions in the sum of £23 million through a complex share purchase arrangement and, as it stood atthe end of 2009, there was around £10.8 million worth of interest owing in addition to that. So we aretalking 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 whathappened in that case, because there have been details of the settlement or leaked details in the media inrelation to this particular issue. You will understand that insofar as the public is concerned and the peoplewe represent are concerned, they would expect large corporates and wealthy individuals to be required tocontribute to the Exchequer and meet their tax obligations in the same way as everybody else. Now, whenyour colleague, Dave Hartnett, has appeared in front of us before, and was, I think, questioned by MrNorman in relation to the Vodafone case, obviously a view was taken within the organisation that thereneeded to be clarification to assure the public as to what the terms of that arrangement were. Now, inrelation to Goldmans, there are serious allegations which have been made in the media in relation toHMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as anorganisation publishing or providing to us information about that case so that the public can be assuredthat 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 uponthe settlements—just a bit about the process and the procedure involved in deciding whether to settlesuch cases?

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

Q415. Mr Umunna: Could you also tell us in relation to the particular case that I have raised whetherthe 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 answeryou gave me before in relation to taking an interest in matters that have arisen after settlement, becausethey 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 HMRCstaff 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 asubject 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—toHMRC 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 justcited, 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 assettlements are concerned with large corporates. I have had discussions that have been about thegovernance with regard to Vodafone and in advance of Mr Hartnett speaking to this Committee earlier inthis year. I was aware that he was going to set out further details to this Committee, but I don’t see it asmy role to discuss each and every case just because there has been a press report critical of HMRC inthat, 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 willlet me finish—politically sensitive? I would say the same characteristics apply to the Goldman case. Youhave just confirmed you are aware of this and you are aware of these reports, yet you don’t seem to haveasked any questions in particular about this politically and publicly sensitive topic when it has come toyour recent conversations with HMRC officials, one of whom has been named in connection with thatparticular case.

David Gauke: I am conscious that a lot of allegations seem to be made on the basis of little or noevidence, as far as I can see. I also made the point that within the constraints that exist as far as clientconfidentiality is concerned I don’t expect—indeed, I am not entitled—to be talked through details thatare not in the public domain. I do have an interest in ensuring that the overall governance is correct, thereis nothing that appears to be out of place, and I do that in a generic case, but I think it would be fair tosay 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 thatwere 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 youdon’t have operational responsibility for what happens at HMRC, insofar as the public is concerned, theywill want to know that you are ensuring that there isn’t one set of rules for wealthy individuals and verylarge 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 madein the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Wouldyou consider as an organisation publishing or providing to us information about that case so that thepublic 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 whetherthe 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 haveconcluded 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 aDepartment feels that it cannot meet a Committee’s request for information, it should make clear itsreasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (withoutresorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosinginformation in open evidence sessions or in memoranda submitted for publication, Departments will wishto 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 differsfrom the oral evidence given by Mr Hartnett to the TSC on 16 March 2011. There was no indication whatsoeveras 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 whetherthe internal procedures were met in relation to the Goldman’s settlement—information that is not confidentialinformation of Goldman Sachs. It would appear that HMRC has abused its statutory discretion on the disclosureof information.

4.44 In the Fleet Street Casuals case, Lord Scarman explained that the Revenue is subject to the writ ofmandamus (now mandatory order) to compel performance of a public legal duty on all occasions where thelaw has established no specific remedy, and where in the interests of justice and good government there oughtto 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 theprinciple that the improper or capricious exercise of discretion is a failure to exercise the discretion whichthe law has required to be exercised: see Lord Mansfield C.J. in Reg. v Askew [1768] 4 Burr 2186 atpages 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 exerciseits statutory discretion to disclose information necessary for its duty of accountability a fortiori the High Courtof Parliament that conferred the discretion on HMRC in the first place should be able to compel it to disclosethis information. The powers of Select Committees to send for “persons, papers and records” relating to theirfield 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 whichhas not been reciprocated by the Department’s leadership. On 30 July 2011 Treasury Committee published areport (Administration and effectiveness of HM Revenue and Customs Sixteenth Report of Session 2010–12HC 731) which stated:

159. A particular source of controversy has been HMRC’s settlement of large tax cases involvingcorporations. Allegations have been made in the press that cases have been settled inappropriately for alower yield than might have otherwise been achieved. We pressed HMRC witnesses and the Minister onwhether the appropriate processes had been used in two high-profile cases. Dave Hartnett, the PermanentSecretary for Tax, vigorously defended the procedures that had been used to achieve a settlement withVodafone and argued that figures cited in the press lacked credibility. HMRC said they were unable tocomment 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 arewe challenging the need for taxpayers’ affairs to be kept confidential. However, the sums involved insome 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 considerthe scope for increasing transparency in the area of large and complex tax cases and for assuringParliament 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 thesubject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committeeof Public Accounts that HMRC should consider how the accountability and transparency of the settlementof large and complex tax cases might be improved. We are taking further evidence on how this mightbe achieved.

4.47 However, despite this repeat by the TSC in July 2011 of the recommendation by the PAC in February2011, 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 theNAO, you are thinking of settlement of an investigation-and that governance does not happen in line withour 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 saythat 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 settlementwas approved without the whole of the High Risk Corporate Programme Board being consulted beforethe taxpayer was told that the case was settled. In another, we reached a conclusion on an issue, notrealising that an impediment to full application of the relevant law no longer applied and that the officialresponsible for taking that to the High Risk Corporate Programme Board did not initially realise that wasnecessary. The governance worked very well, because the High Risk Corporate Programme Boardidentified that issue.

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

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 appliedin a particular way, and the individuals involved in the case did not realise that that impediment hadbeen 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 ProgrammeBoard later than it should have been-only by days-because the individual responsible for the case did notrealise 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 processdesigned 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 asettlement 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, inwhich they were-

Dave Hartnett: I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I couldnot do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there wasanything 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 isGoldman Sachs, and my legal advice says I cannot say anything that adds to or detracts from thatspeculation.

Q701. Jesse Norman: My last statement was not intended to be dispositive either way on that; it is justa question, which is: if there was a governance error, has the error been corrected, regardless of who theinstitution or not may be?

Dave Hartnett: I am very sorry, but because of the huge media speculation that that second case isGoldman Sachs, I am unable to answer any questions. I do not want to be difficult with the Committee. Iknew 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, haveyou ever had corporate hospitality from Goldman Sachs?

Dave Hartnett: I have been to a supper with Goldman Sachs. I would not call it corporate hospitalityfrom them. I went with a managing director from the Treasury to talk to about 20 chief finance officersfrom 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 withGoldman’s tax affairs.

Q704. Jesse Norman: That is a helpful clarification. By extension, I assume you cannot talk aboutVodafone, 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, Icould 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 Vodafonesettlement is that the Treasury never collected the interest owing on the tax that was payable. I forget ifyou addressed that issue last time; did it in fact collect the interest that was payable on the tax thatwas owing?

Dave Hartnett: I am in the same place again, Mr Norman. Can I just say, I would really like to answerthese 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 tohaving 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 taxthat was payable. Let me ask another question: does the law require that interest be paid on tax thatis 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 wehave not sought tax-I am just trying to find a note I wrote to myself on this-is in relation to certaincontrolled foreign companies, where following a change in the law on the taxation of overseas dividendsin 2009, so that the majority of dividends paid by overseas companies were no longer taxable, we lookedagain at how certain exemptions applied. We discussed this with our own lawyers, other lawyers, andbusiness 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 interestarises 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 tobe clear, circumstances under which interest might not legally be required to be paid on tax owing are ofthe 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 periodof time, much later than 2009. It is absolutely opaque as to why the treatment of dividends would haveany 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 cannotanswer questions on Vodafone. I am very sorry.

Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some £6.2billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggestinga list showing £6.5 billion. Something like just under £6 billion of that was from fighting group litigationchallenges. Only about £100 million was on corporation tax avoidance cases. That is £100 million out ofthe £6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunalsince 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 thosenumbers, 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 30or so following cases. The analysis you have given, which I have not made for myself, so I cannot reallycomment 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 withlarge businesses that are following on from some of those cases? On VAT, it is more usual to find thateach case has to be heard on its own merit, so you will find that there are often a lot of other companiesstanding behind what may appear to be quite a small number of cases but actually involves quite a largeamount of tax.

Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel verystrongly about the high penalties being imposed on small business, and the small penalties being imposedon large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages beingcharged in penalties and, of course, when you have a negotiated settlement, almost by definition there isno standard compared to which you can charge penalties, which build in a bias in favour of largecompanies, 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 ascheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, therewas no penalty charged at all, as far as I am aware, but there are countless cases-every constituency hasthem-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 theHouse 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 madethe point about the drop in paying penalties.



Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated andwon that involves avoidance, or that we have settled, to determine whether the law allows a penalty to betaken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that Iknow 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 pointfirst. In order to take a penalty from large business, we have to find that the law can be applied. Withsmaller business, there is more often dishonesty, or-

Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with youwith 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 termsof 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 intobig 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 legalreport: “HMRC win on ‘mis-labelling’ (Tax newsflash, June 2009)”. It says that the Court of Appealaffirmed 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 thatpenalties should be paid. These people have attempted to get away with not paying, and they have beenfound out.

Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appealis 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 yousimply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basisfor charging a penalty?

Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itselfenough 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. Itseems 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 unclearwhat 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 forincreasing transparency in the area of large and complex tax cases and for assuring Parliament and the publicthat due process in the resolution of these cases is being followed have not and will probably never achievethe desired result. It is equally clear that HMRC’s Solicitor’s Office and the National Audit Office cannot berelied on wholly to protect the public interest in regard to the provision of internal and external governanceover the collection of revenue from the biggest taxpayers in the country by the Commissioners.

6 October 2011

Further written evidence from Osita Mba

RE: PUBLIC INTEREST DISCLOSURE ACT 1998HM REVENUE & CUSTOMS’ PROCEDURES FOR SETTLING TAX DISPUTES

1. I respectfully present my compliments to you and humbly request that consideration be given to thisadditional public interest disclosure. It has become necessary in light of significant inaccurate and misleadingevidence given to your Committee in the course of the hearings on 12 October, 17 October and 7 November2011.

Summary

2. It is a fundamental constitutional principle that liability to taxation is a matter for Parliament. On theother hand, the powers of the Commissioners for Her Majesty’s Revenue and Customs (HMRC) are limited tothe collection of revenue (taxes, duties and national insurance contributions (NIC)). Therefore while Parliamenthas conferred the Commissioners with a managerial discretion as to the best and most practicable means ofmaximising revenue for the Exchequer, Parliamentary sovereignty over the imposition of liability to taxationplaces certain important limitations on this discretion. Some of these limitations are highly relevant to therecent evidence provided to your Committee and to the National Audit Office (NAO)’s proposed re-examinationof the Goldman Sachs and Vodafone settlements.



3. First, the rate of interest that applies to late payments of tax and NIC is equally fixed by Parliament.Therefore while the Commissioners are entitled to take accrued interest into account in foregoing revenue in theexercise of their managerial discretion they cannot vary the quantum of accrued interest, which is determined bysimply applying the appropriate statutory rate to the outstanding principal. However, the Comptroller andAuditor General of the NAO (C&AG) informed your Committee on 12 October 2011 that the accrued interestin relation to the Goldman Sachs case was a range of figures—“between £5 million and £8 million” (Q121)before settling for “£5 million” (Q125). Similarly, Mr Hartnett claimed that “the sum is smaller than [£10million]” (Q24).

4. However, as I explained in my memorandum, the quantum of accrued interest should be £20 million inrough figures (excluding penalty). Paragraphs 7 to 39 below demonstrate that the £20 million estimate issupported by a published Tribunal judgment (see Goldman Sachs International and Goldman Sachs Limited vThe Commissioners for Revenue and Customs [2009] UKUT 290). That judgment also contradicts the followingevidence given to your Committee by Mr Hartnett (Q21): “I had overseen the 2005 settlement of the issues,and I knew of the legal impediment to collecting interest. My colleagues were in a similar position of knowing,and so was someone from the taxpayer. We were all confident that we knew that. The dispute that was in thehands of the lawyers was over the principal sum; it was not a dispute about interest.” As explained below,there was no legal impediment to collecting interest either in 2005 or at any other time before the eventualsettlement, and both HMRC and Goldman Sachs acknowledged publicly throughout the litigation that thedispute was over both the principal sum and the interest.

5. Secondly, Parliament has also enacted strict requirements for the settlement of appeals before the Tribunal,notably section 54 of the Taxes Management Act 1970 for direct taxes and regulation 11 of the Social SecurityContributions (Decisions and Appeals) Regulations 1999 for NIC. The effect of the regulation 11 on theGoldman Sachs settlement was that although Mr Hartnett was authorised to “shake hands” on the proposedsettlement on 19 November 2010, this informal agreement did not become binding on HMRC until it was setout in an exchange of letters initiated by HMRC on 22 February 2011 by the litigation lawyer on the orders ofMr Inglese. Paragraphs 40 to 58 below highlight the intervening events between these two dates, in particularthe meeting of the High Risk Corporates Programme Board on 30 November 2010 and the meeting of thelawyers on 8 December 2010, against this legal background.

6. Thirdly, the duty imposed on the Commissioners by Parliament is to collect tax as it falls due in respectof actual transactions. Thus it was held in Al Fayed and Others v Advocate General for Scotland (representingthe Inland Revenue Commissioners) [2004] STC 1703, that the Commissioner’s managerial discretion does notextend to entering into an agreement with a taxpayer as to his future tax liability. Paragraphs 59 to 68 belowexplain that if (as indicated by the MP for North East Cambridgeshire at your Committee’s hearing on 7November 2011 (Q358)) the Vodafone settlement in 2010 includes the company’s liability for 2011 and 2012,it may be ultra vires and not binding on HMRC to that extent.

A. Quantum of Loss to the Exchequer on the Goldman Sachs Settlement

7. As I explained in paragraphs 2.14 and 2.35 of my memorandum, HMRC (then Inland Revenue) issuednotices of liability to NIC against Goldman Sachs International (GSI) on 12 December 2002. The liabilitycomprised: (a) unpaid NIC in the sum of £23.2 million (£7,295,056.85 for 1997–98, £6,472,974.83 for1998–99, and £9,462,520.69 for 1999–2000) and (b) accrued interest on the aforementioned liabilities to 12December 2002.

8. The liability related to bonuses paid to staff supplied to GSI by another Goldman subsidiary—GoldmanSachs Services Limited (GSSL)—which has its principal office address in the British Virgin Islands. On 13December 2002, GSI appealed those decisions to the First-Tier Tribunal. The appeal was activated by GSI andGSSL (which had hitherto not been involved in the proceedings) in November 2008 by their request for alisting. On 9 December 2008, GSI and GSSL made a joint application in the restored appeal for a directionconcerning a preliminary hearing on which of the two companies would be liable to the NIC liability.

9. GSSL was the formal employer of staff who worked for GSI, although GSI funded GSSL’s payments tothose employees. But in June 1999 certain GSSL employees became direct employees of GSI. If GSSL wasnot “present” in the UK within the provisions of the relevant legislation (as argued by HMRC) then thecompany liable to pay the contributions was GSI as the host employer. On the other hand, if GSSL was presentin the UK (as contended by Goldman Sachs) then it was liable to pay the contributions. However, in relationto the employees directly employed by GSI from June 1999, there was no dispute that GSI was liable to payany contribution.

10. The First-Tier Tribunal rejected the joint application by GSI and GSSL for a direction concerning apreliminary hearing and the companies appealed to the Upper Tribunal. This appeal was heard on 21 October2009 by Mr Justice Norris who allowed the appeal and directed the preliminary hearing. His judgement, whichwas published on 23 December 2009 (see Goldman Sachs International and Goldman Sachs Limited v TheCommissioners for Revenue and Customs [2009] UKUT 290), contains a useful public record of the quantumof accrued interest at significant periods between 2002 and 2011.



10 December 2003—£7.61 million

11. The Limitation Act 1980 prevents any action to enforce recovery of amounts due after six years fromthe date on which the liability arose. Although the Act specifically excludes Crown proceedings to recover“any tax or duty or interest on any tax or duty” HMRC accepts that NIC is not a tax or duty. Therefore, theAct places a time-bar on actions for recovery by HMRC of NIC due after 6 years from the date on which theliability arose. In order to prevent this effect of the Act on Goldman’s liability in this case, HMRC issued aclaim in the County Court against GSI while the appeal before the Tribunal was outstanding.

12. In fact, GSI and GSSL raised the preliminary issue referred to in paragraph 9 above in 2008 (more thansix years from the date on which the liability arose) on the basis that since HMRC instituted the County Courtproceedings against GSI but not GSSL HMRC would be time-barred from recovering the NIC liability shouldthe Tribunal find that GSSL was the company liable.

13. You will recall that the note of the lawyers’ meeting on 8 December 2010 referred to this County Courtclaim in this passage: “GS had apparently suggested the principal might be £16 million. Discussing whetherthis altered things. DR pointed out that the claim form and probably the Particulars of Claim in the CountyCourt were public documents and could be copied by anyone interested in comparing the settlement sum withthe claim.”

14. However, the details of the claim had already been disclosed in the judgment of Mr Justice Norrisreferred to above (Goldman Sachs International and Goldman Sachs Limited v The Commissioners for Revenueand Customs [2009] UKUT 290). In paragraph 14 of that judgment, he stated: “On 10 December 2003,HMRC commenced proceedings in the Central London County Court seeking repayment of some £30.81million of unpaid NIC and interest.” In other words, as at 10 December 2003, the accrued interest on theunpaid NIC principal of £23.2 million was £7.61 million.

31 October 2005—£10.8 million

15. By the time of the 2005 settlements, the accrued interest had increased to £10.8 million. Thus on 7October 2005, the relevant HMRC Officer in the then Special Civil Investigations (SCI) now SpecialInvestigations (SI), wrote to the Managing Director of Goldman Sachs International (Mr Housden, who wouldhave been involved in the settlement reached by Mr Hartnett on 19 November 2010) stating, amongst otherthings, as follows:

This is in preparation for resolving your appeals by litigation. HM Revenue & Customs is,however, prepared to settle the open appeals by either litigation or by a negotiated settlement.The terms of a negotiated settlement that we would find acceptable are:

— Payment of 100% of the Employer’s NIC outstanding, and— Non-payment of the late payment interest accruing on the NIC.

I understand from our discussion on 19 September that this is unlikely to be of interest to you,however, as this is an offer that is being made to all participants it seemed right to make theoffer to yourself as well.The offer of a negotiated settlement is open until 5pm on Friday 9 December 2005. ...For the avoidance of doubt, please note that should litigation be necessary to resolve mattersthen interest will continue to accrue on the principal NIC debt. ...I enclose, as an appendix, a table detailing the position in respect of the Employer’s NIC payable..., per our records, and the interest due up until 31 October 2005.

Appendix to letter dated 7 October 2005

Year NIC Due Interest to 31/10/2005

1997–98 £7,295,056.85 £4,079,252.241998–99 £6,472,974.83 £3,032,305.691999–00 £9,462,520.69 £3,704,214.86Total £23,230,552.37 £10,815,772.79

16. In the event, Goldman Sachs rejected the offer and interest continued to accrue on the NIC liability asadvised in the letter and line with settled law and HMRC’s practice.

17. It should be noted that there was no suggestion in the letter that interest would start to accrue from thedate the offer was rejected, which would have been a deviation from settled law and practice. However, thisappears be what the C&AG and Mr Hartnett implied when they informed your Committee on 12 October 2011that the interest is “between £5 million and £8 million” (Q121) or “smaller than [£10 million]” (Q24).

18. The quantum of accrued interest from 31 October 2005 to the date of the settlement (22 February2011) may be slightly “smaller than £10 million” but this amount does not include the £10.8 millionaccrued as at 31 October 2005. Having rejected the 2005 settlement offer which the other 21 companiesthat used the avoidance scheme accepted, Goldman was not entitled to a release from the payment ofthe £10.2 million accrued at the date of the 2005 offer.



19. You will recall that during your Committee’s hearing on 17 October 2011, Mr Hartnett gave this verysignificant evidence when questioned by the MP for South Norfolk:

Q250 Mr Bacon: Since it is very common to charge interest—it is standard practice to chargeinterest—wouldn’t consulting lawyers on that question have been the obvious thing to do?

Dave Hartnett: There are two things to say with that, Mr Bacon, one of which I touched on lastweek. I had overseen the 2005 settlement of the issues, and I knew of the legal impediment tocollecting interest. My colleagues were in a similar position of knowing, and so was someonefrom the taxpayer. We were all confident that we knew that. The dispute that was in the handsof the lawyers was over the principal sum; it was not a dispute about interest.

Q251 Mr Bacon: Hang on a minute. The legal impediment that you thought you were confidentabout was a supposed impediment to the charging of interest.

Dave Hartnett: Yes.

Q252 Mr Bacon: But the 2005 settlement that you were talking about was several years previously.

Dave Hartnett: Yes.

Q253 Mr Bacon: Would it not have been standard practice to revisit why it was that you were soconfident about the nature of that impediment?

Dave Hartnett: Well, because I had not been running the case, but those with me had, and betweenus—and I am very sorry about this—we all believed the impediment still to be there.

Q254 Mr Bacon: But you actually wrote to Goldman Sachs-

Dave Hartnett: I don’t think-

Q255 Mr Bacon: Sorry, not you. HMRC wrote to Goldman Sachs and told it that the interestwould run—that the interest would continue to roll up and be due if it did not settle with the other21 companies.

Dave Hartnett: I’m sorry, Mr Bacon, I was unaware of that letter until you mentioned it to me.

Q256 Mr Bacon: I bet you found out afterwards.

Dave Hartnett: I might have.

20. There is no evidence to support Mr Hartnett’s claim that there was a legal impediment to collectinginterest in 2005, and which he and the head banking sector and the case relationship manager (who werenot part of the legal team “running the case”) and someone from Goldman Sachs believed to exist in2010. In fact, the 2005 letter contradicts this assertion.

21. Furthermore, the claim that “the dispute that was in the hands of the lawyers was over theprincipal sum” and “not a dispute about interest” is inconsistent with the judgment of Mr Justice Norriswhich, amongst other things, stated (see paragraph 7 above) that: “On 10 December 2003, HMRCcommenced proceedings in the Central London County Court seeking repayment of some £30.81 millionof unpaid NIC and interest.”

22. Indeed, subsequent passages of the judgment show that neither HMRC nor Goldman Sachsbelieved that the £10.8 million interest accrued as at 31 October 2005 was waived or that there was anylegal impediment either to its recovery or to the recovery of future interest.

21 October 2009—£17 million

23. At the hearing in the Upper Tribunal on 21 October 2009, Goldman Sachs put the accrued interestat £17 million. Thus in reference to the preliminary issue set out in paragraph 9 above, Mr Justice Norrismade this statement in paragraphs 18 and 19 of his judgment:

18. Now, the question whether GSSL was present in Great Britain, (and so meaning that it and notGSI was the contributor), is entirely distinct from the question whether the scheme worked. If itestablished by the preliminary issue that GSSL was the contributor, then the question of liability ofGSI (ie whether the scheme worked) only arises in relation to the GSI employees for the nine monthsfollowing June 1999. That liability represents only about 25% of the total liability to NIC sought tobe imposed by HMRC.

19. Mr Goldberg QC for GSI says that at that level, namely £10 million instead of £40 millionin rough figures, the claim is likely to be settled.

24. In other words, according to Goldman Sachs, the accrued interest on 21 October 2009 was £17million (being £40 million less the NIC principal of £23.2 million).

25. In the event, as explained in my memorandum (paragraph 2.26 to 2.33), Goldman Sachs lost thispreliminary argument when it was heard in the First-Tier Tribunal on 17 and 18 December 2009. In hisjudgement published on 26 April 2010 (see Goldman Sachs International v HMRC [TC00507]), Judge Davidfound (in paragraph 105) “as fact that GSSL was the foreign employer and that GSI was the host employer ofthe two named individuals throughout those parts of the period relevant to these appeals when GSI was notdirectly their employer.”



26. Therefore the accrued interest, which amounted to £17 million in October 2009, should increase in linewith the relevant statutory rates in the period between the 2009 hearings and 22 February 2011 when the casewas settled.

27. As Goldman Sachs’s publicly stated position was that the accrued interest on the unpaid NIC of£23.2 million was approximately £17 million on 21 October 2009 (giving a total liability of “£40 millionin rough figures”), the C&AG’s assertion that the accrued interest 16 months later was “between £5million and £8 million” or “£5 million” (giving a total liability of between £28.2 million and £31.2 million)invites further scrutiny.

28. Furthermore, the passages of the judgment of Justice Norris cited in paragraphs 14 and 23 aboveshow that (contrary to Mr Hartnett’s claims that there was a legal impediment to collecting interest in2005 and that the litigation was over the principal sum and not about interest) it was public knowledgethat the litigation was over both the principal sum and the accrued interest throughout.

22 February 2011—£20 million

29. As explained below, the date of settlement was 22 February 2011 (or more precisely whenever Goldmanaccepted HMRC’s written offer of that date). The accrued interest at this date would be £20 million inrough figures (comprising the £10.8 million accrued from 12 December 2002 to 31 October 2005 plus theaccrued interest from 31 October 2005 to 22 February 2011). Therefore the NIC liability and accruedinterest would be £43 million in rough figures.

30. The C&AG’s suggestion (Q121) that: “If the interest had been on the table, it does not follow thatbecause the interest was not considered, as it clearly should have been, the settlement would necessarily havefully reflected that in increased quantum” does not appear to reflect accurately the law or HMRC’s practicegiven the publicly available facts of this case.

31. In his judgment (paragraph 32) Mr Justice Norris set out the respective positions of both sides (in apassage that further undermines Mr Hartnett’s contentions that the litigation was about the principal sum onlyand that there was a legal impediment to the collection of the interest) thus:

“HMRC’s publicly stated position is that it is opposed to a settlement of any sort. HMRC willcontemplate only capitulation to its present demands. It says that there is no question of settling withGSI in respect of GSI’s liability for the GSI employees because it has already settled with 21 othertaxpayers and to settle with GSI would not be consistent with the terms it offered those other 21taxpayers. There is accordingly no question of a settlement, even a settlement on harsher terms thanthose put upon the other 21 taxpayers. What is required is complete capitulation. Mr Goldberg QC’spublicly stated position in relation to GSI is that GSI is certainly willing to settle and that, if it winsthe preliminary issue, it may well, though no decision has been taken and no offer is made, capitulateon that issue because it is only £10 million out of £40 million.”

32. However, following HMRC’s victory on the preliminary issue in the First-Tier Tribunal and GoldmanSachs’s appeal to the Upper Tribunal, HMRC’s lawyers obtained further confirmation from Malcolm GammieQC to the effect that it had a “strong” case under the terms of the Litigation and Settlement Strategy (LSS).Therefore, under the LSS and Code of Practice 8 (COP 8) a minimum settlement of about £43 million wasexpected from Goldman Sachs by those running the case. However, Mr Hartnett appeared to have settled thecase for £23.2 million without consulting them thus incurring a loss to the Exchequer in unrecovered interestin the sum of £20 million in rough figures.

33. Furthermore, the LSS and COP 8 authorised HMRC to recover, in addition, a penalty of up to 100% ofthe £43 million liability. However, unlike interest which is fixed, any penalty would have been subject tonegotiation. Indeed, to paraphrase the C&AG’s statement (which should properly apply to penalty rather thanto interest in the circumstances of this case): “If the penalty had been on the table, it does not follow thatbecause the penalty was not considered, as it clearly should have been, the settlement would necessarily havefully reflected that in increased quantum”.

The Role of the National Audit Office

34. You will recall that when the MP for South Norfolk challenged Mr Hartnett on the apparentinconsistencies in his account regarding the lost interest at your Committee’s hearing on 17 October 2011, MrHartnett’s only recourse was the NAO (Q35): “if the NAO is going to look at the matter, it should all comeout then, because there is much more detail to come out.”

35. The C&AG and his officials have informed your Committee at every available opportunity that theirreport covered the Goldman Sachs settlement. However, it is pertinent to note that despite my public interestdisclosures to them and the additional information at their disposal all the NAO reported (in paragraph 2.37)was that: “A case was settled before the Department recognised that it should have been referred to theProgramme Board. The Board identified a financial error, demonstrating its value as a check on settlementproposals.”



36. The fact that this “financial error” was not corrected resulting in loss to the Exchequer was not apparentin the NAO’s report. Indeed, the report concluded (in paragraph 2.35) that they “did not identify any instanceswhere [the Commissioners’ discretionary powers to forego the collection of tax] were exercisedinappropriately.”

37. Moreover, as noted above, the C&AG went to great lengths in his evidence to your Committee on 12October 2011 to play down the cost to the Exchequer of this “financial error” by, amongst other things, reducingthe accrued interest from £20 million to “between £5 million and £8 million” and then to “£5 million”.

38. Since the C&AG has announced (Q230–247 October 2011) that they “would put [themselves] in aposition to examine the reasonableness of some of the larger settlements” while Mr Hartnett has assured (Q246)that “it should all come out then, because there is much more detail to come out”, it is worth setting out inmore detail the parts of the C&AG’s evidence that require further clarification:

Q120 Chair: Can I ask the Comptroller and Auditor General: do you think the loss to the taxpayerafter the settlement with Goldman Sachs was reasonable—bad value, good value?

Amyas Morse: I can certainly say that the error we are talking about, which is referred to in ourreport-

Q121 Chair: We do not know the quantum. Do you?

Amyas Morse: Let me just go on. I think the error was probably one which might have led to thebelief that interest was applicable or mistakenly thinking that interest was not applicable. The rangeof the error-not simply the amount of tax that might have been involved-that it is reasonable to giveis between £5 million and £8 million. However, and having been a tax person myself many, manyyears ago, negotiating much smaller settlements-I have never negotiated anything of this size-I knowthat a lot of factors will be involved in this settlement. If the interest had been on the table, it doesnot follow that because the interest was not considered, as it clearly should have been, the settlementwould necessarily have fully reflected that in increased quantum.

Q122 Chair: Did the taxpayer get value for money out of the settlement that was made withGoldman Sachs?

Amyas Morse: I cannot give you an answer. I am not being coy.

Q123 Joseph Johnson: I am sorry; I did not understand the interest that could be lost.

Amyas Morse: What I am trying to say is this. In negotiating any large case, a whole series of factorsis taken into account and there is give and take. If it was really an open-and-shut negotiation-forgiveme-I am talking from very out-of-date experience. If it was really open and shut, it would be openand shut. It is not as simple as that. There must be a sustainable argument on the side of the taxpayerif there is any prolonged negotiation.

Q124 Mr Bacon: Can I just pick up on that very point? Twenty-one of the 22 scheme users realisedthat it was open and shut and paid up. The litigation and settlement strategy is very clear. We hadthis conversation with Lesley Strathie last year on this very point. Where the character of the case isall or nothing, and the question is merely, “Does the law apply or not?”, the strategy says clearly thatyou should settle for 100% and you should not take down. They took down, in circumstances whereit was quite clear that interest was applicable. Not only that, HMRC had actually warned GoldmanSachs that if it persisted in resisting, which it did for five years with a lot of spurious arguments infront of the tribunal with stooge witnesses, that interest would be liable. HMRC itself had toldGoldman Sachs that interest would be liable; that is the context.

Amyas Morse: Well, not necessarily. Setting aside for a minute whether we are talking aboutGoldman Sachs, if in a multi-factor settlement there was an admitted mistake in taking into accountentitlement of interest, I am simply making the point that if you say, “That amount of mistake isexactly the amount of tax lost”, it is a little bit simplistic. There was a composite settlement. I thinkthat is all I can say.

Q125 Matthew Hancock: Are you saying that the cost due to this mistake is £5 million to £8million?

Amyas Morse: I am saying that the quantum of the mistake was £5 million.

Matthew Hancock: The financial error was £5 million.

39. I hope that this additional public interest disclosure will assist your Committee and the NAO indetermining the quantum of the loss to the Exchequer in accrued interest and penalty on the Goldman Sachssettlement.

B. The Processes that Led to the Goldman Sachs Settlement

40. Regulation 11 of the Social Security Contributions (Decisions and Appeals) Regulations 1999, whichapplies to the Goldman Sachs settlement, provides as follows:

Settling of appeals by agreement11.—(1) Subject to the provisions of this regulation, where before an appeal is determined by thetribunal, an officer of the Board and every person who has appealed against the decision come to an



agreement, whether in writing or otherwise, that the decision under appeal should be treated as upheldwithout variation, as varied in a particular manner or as superseded by a further decision, the likeconsequences ensue for all purposes as would have ensued if, at the time when the agreement wascome to, the officer of the Board had made a decision in the same terms as the decision under appeal,had varied the decision in that manner or had made a decision superseding the decision under appealin the same terms as that further decision, as the case may be.

(2) Where an agreement is come to in the manner described in paragraph (1) the appeals of allpersons who have appealed against the decision lapse.

(3) Notice of the agreement must be given by the officer of the Board to the persons named in thedecision who have not appealed against it.

(4) Where an agreement is not in writing–(a) the preceding provisions of this regulation do not apply unless the fact that an agreementwas come to, and the terms agreed, are confirmed by notice given by the officer of the Boardto the appellant and any other person who has appealed against the decision or by the appellantor any other person who has appealed against the decision to the officer of the Board; and(b) the references in those provisions to the time when the agreement was come to shall beconstrued as references to the time of the giving of the notice of confirmation.

41. Therefore, while regulation 11(1) of the Social Security Contributions (Decisions and Appeals)Regulations 1999 authorised Mr Hartnett to “shake hands” on the proposed settlement on 19 November 2010in the exercise of his managerial discretion, regulation 11(4) ensured that this informal agreement was notbinding on HMRC until the fact that an agreement was come to, and the terms agreed, was confirmed inwriting. As explained below, this happened on 22 February 2011 when litigation lawyer wrote to GoldmanSachs’s lawyers on Mr Inglese’s instructions confirming the non-binding deal struck by Mr Hartnett.

42. It is helpful to consider the intervening events between these two dates, in particular the meeting of theHigh Risk Corporates Programme Board on 30 November 2010 and the meeting of the lawyers on 8 December2010, against this legal background.

Informal Settlement on 19 November 2010

43. At your Committee’s hearing on 12 October 2011, Mr Hartnett stated that he went to Goldman’s officeson 19 November 2010 “to assist [his] colleagues (namely ‘the head of our banking sector in the large businessservice and the case relationship manager with the bank ... who were managing the issues’) to deal with a verydifficult relationship issue” (Q16–Q17). However, he ended up “shaking hands” on the ongoing litigationwithout consulting the lawyers running the case, none of whom was present at the meeting. Consequently, asthe note of their meeting on 8 December 2011 put it: “GS had apparently suggested the principal might be£16 million”. In fact, it was £23.2 million.

44. At your Committee’s hearing on 17 October 2011, Mr Hartnett gave this further evidence:

Q241 Dave Hartnett: ...I think I explained to the Treasury Committee that there were actually twomistakes. There was one financial error, and there was a mistake made in not reporting the caseinstantly to our high-risk corporate programme board.

Q242 Mr Bacon: When you say not reporting the case, do you mean not reporting the settlement?

Dave Hartnett: Not reporting the settlement, yes.

Q243 Mr Bacon: So you cut a deal but you did not tell anybody? Is that what you are saying?

Dave Hartnett: No, no. I am not saying that at all.

Q244 Mr Bacon: ... A deal was struck but it was not reported immediately. What does that mean, ifnot that you cut a deal but you didn’t tell people?

Dave Hartnett: A settlement was reached, which all the HMRC people believed to be within theauthority of the sector lead and the case relationship manager to reach. Over the weekendfollowing the settlement, the sector lead began to realise that it was not within his competenceto do that. That was the other mistake, and it was referred late to the high-risk corporateprogramme.Q245 Mr Bacon: Right. How late? How much later was it referred?

Dave Hartnett: Days.

Q246 Mr Bacon: And why wasn’t it within his competence?

Dave Hartnett: Because he had not fully consulted the other areas of our business interested inthe issues.

Q247 Mr Bacon: That sounds familiar, actually-not consulting people who are familiar with theissues. So that was the second mistake: the deal was not reported immediately. The first mistake waswhat you described as a financial error.

Dave Hartnett: The NAO described it as such, but I agree with the description.

Q248 Mr Bacon: That was also the legal error in thinking that you could not charge interest, was it?



Dave Hartnett: Yes.

Q249 Mr Bacon: Whereas you actually could. In coming to the conclusion that you could not chargeinterest, did you consult lawyers about that?

Dave Hartnett: No.

Mr Bacon: You didn’t?

Dave Hartnett: No.

45. Although there is no dispute that HMRC’s corporate governance rules were not met in reaching theGoldman Sachs settlement, it is necessary to highlight these rules, as set out in the Litigation and SettlementStrategy and the High Risk Corporates Programme, in order to obtain as full a picture as possible of the eventssurrounding the settlement.

Litigation and Settlement Strategy (LSS)

46. The 2007 LSS (the LSS was recently “refreshed”) emphasised (in paragraph 13) that settlement termsmust be consistent with the reasons for undertaking an enquiry in the first place, which are to influence taxpayerbehaviour positively and to challenge behaviours that contribute to the tax gap. Thus while that version of theLSS clearly anticipated that deals would continue to be done, it set out a number of principles which must beapplied in reaching settlement. The main principles were as follows (paragraphs 14–16):

— Some disputes have an all-or-nothing character, involving a single point of law that would bedecided one way or the other by the courts, with no middle ground. Such disputes should besettled on all-or-nothing terms: do not split the difference or offer any discount for an agreementnot to litigate.

— Where there are good grounds to believe that negligence or evasion is involved (i) settlementterms must not allow these behaviours to be rewarded by financial gain and so must include a bestestimate of the tax and interest due (ii) Do not undercharge tax, interest or penalties in theinterest of quick settlement, even if doing so would provide a good return on time spent on thecase. Always consider whether settlement terms do enough to promote positive customerbehaviours and deter non-compliance.

— In avoidance cases (i) do not assume the facts are as described in the scheme. Check forimplementation failure and always consider a penalty if an avoidance scheme fails because ithas not been implemented correctly; (ii) if our legal advice is strong, do not accept settlementsfor less than 100% of the tax and interest due.

47. According to paragraph 2.21 of the C&AG’s report: “The Litigation and Settlement Strategy sets outa clear framework for resolving disputes. When settlements are authorised, whether by Commissioners,the Programme Board or at lower levels, there is a requirement to confirm that the settlement complieswith the Litigation and Settlement Strategy.” Clearly, this requirement was not met in reaching the GoldmanSachs settlement.

High Risk Corporate Programme (HRCP)

48. The C&AG’s report also describes the processes applying to the largest disputes under the HRCPas follows:

2.12 The Department has five Commissioners, who have ultimate responsibility for collecting andmanaging tax revenues. In practice, Commissioners are normally only directly involved in signingoff the settlement of the largest tax disputes. ...

2.16 For disputes dealt with outside the Programme, the Customer Relationship Manager is initiallyresponsible for bringing together the relevant specialists in resolving tax issues. The Departmentencourages these parties to reach consensus on how the issue should be resolved but, if they cannotagree, 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 theProgramme. For cases outside the Programme where the tax under consideration is less than £100million, agreement must be reached between the relevant stakeholders. Since November 2009, casesmust be referred to the Programme Board before settlement where the tax under considerationexceeds £100 million, and there is a proposal for the Department to concede one issue or more, orto accept less than 100 per cent of the total tax under consideration, or where the case and issues areparticularly sensitive.

2.18 For companies within the Programme, the decision is taken by the Programme Board if the taxunder consideration exceeds £20 million for one issue or £50 million for a combination of issues ina settlement, or where there are issues of particular sensitivity, difficulty or with wider significance.Issues of lower value are also referred to the Programme Board where the Department’s stakeholderscannot reach consensus. The Programme Board must reach a consensus on the matters referredto it; it does not take decisions by majority. Any issues where the Programme Board cannotreach a consensus are referred to Commissioners for sign off.



2.19 All individual issues where the tax under consideration is more than £250 million, or wherethere is potential for adverse national publicity or for questions to be raised in Parliament, or whichrepresent a significant departure from previous policy, must be signed off by Commissioners. Inpractice, two Commissioners are required to sign off settlements, usually the Permanent Secretaryfor Tax, as the Department’s senior tax specialist, and the Director General for Business Tax.

2.20 The Department has established teams of specialists for taxes, aspects of taxes and policy andlegal matters and has processes for involving relevant specialists in considering each tax dispute. Therequirement for consensus among these specialists, and defined procedures for escalating issues whereagreement cannot be reached, help to ensure that the relevant knowledge and expertise are deployed.

49. Therefore, it is significant that, in the words of Mr Hartnett, on 19 November 2010 “a settlementwas reached, which all the HMRC people (including Mr Hartnett who set up the HRCP) believed to bewithin the authority of the sector lead and the case relationship manager to reach”, and “over theweekend following the settlement, the sector lead began to realise that it was not within his competenceto do that”; yet on 22 February 2011 this flawed, non-binding settlement was completed by HMRC’slawyers.

The HRCP Board Meeting of 30 November 2010

50. In the meantime, on 30 November 2010, the proposed settlement was submitted to the HRCP Board(where it properly belonged) for approval. The note of the meeting on 8 December 2010 gives this account:“AE [Mr Alan Evans, the Solicitor’s Office senior representative in the High Risk Corporates ProgrammeBoard] explained that at the High Risk Corporates meeting the previous week a late submission had come inabout a deal on which DH had ‘shaken hands’ with GS. The status of this agreement was not clear.”

51. Furthermore, there appears to have been a suggestion to the Board that the interest was not recoverable:“A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal mightbe protected, the interest might not.” At the meeting of 8 December 2010, the litigation lawyer corrected thismisrepresentation: “DR said this was not correct; it was all covered, per his note.”

52. At the Board’s meeting of 30 November 2010, Mr Alan Evans reportedly raised some concerns aboutthe proposed settlement. As the HRCP Board must reach a consensus on the matters referred to it and doesnot take decisions by majority (see paragraph 2.18 of the C&AG’s report), it appears that the settlement wasnot approved at this meeting.

53. It was following this meeting that Mr Hartnett, who had returned to the country on 5 December 2010(see Q511 of the evidence taken on 17 October 2011), sought Mr Inglese’s assistance (see Q342 to Q351, andQ333 to 337 of the evidence taken on 7 November 2011) on 7 December 2010.

The Meeting of the Lawyers on 8 December 2010

54. Mr Inglese informed your Committee (Q339) that: “On 7 December, I started to gather information. Iconvened meetings on 7 and 8 December.” The note of the meeting of 8 December 2010 shows that theinformation he obtained from his litigation lawyers included the following:

(a) Counsel’s positive opinion on the strength of HMRC’s case. (“Mr Gammie’s advice was broadlypositive both on whether we had the right GS company and in relation to the scheme”).

(b) Confirmation that the accrued interest was protected through a County Court claim and was thusrecoverable. (“A brief note was prepared for the meeting including at pt 3 a suggestion that, whilstthe NIC principal might be protected, the interest might not. DR said this was not correct; it was allcovered, per his note”).

(c) Details of the 2005 settlement and the lack of clarity on the details of the proposed settlement. (“Itwas not clear whether DH had settled on £24 million or on whatever the principal was. There wasdiscussion about whether there could be justification for settling without interest, especially in viewof the Litigation [and Settlement] Strategy. A particular concern was the 2005 ExCom settlementswith all the other scheme users. AI asked if there was a risk of that being re-opened”).

(d) Conduct of Goldman Sachs in the litigation. (“It was however, clear that the proposed settlement gaveGS no additional penalty for having resisted for five more years, including as DR explained raking[up] every conceivable point in the Tribunal, and putting up a ‘stooge’ witness when Mr Housdenwas the obvious person to answer questions.”)

55. Furthermore, Mr Inglese would have been aware that under regulation 11 of the Social SecurityContributions (Decisions and Appeals) Regulations 1999 was no binding agreement, as the proposed settlementwas yet to be confirmed in writing.

Final Settlement of 22 February 2011

56. As General Counsel and Solicitor, Mr Inglese is “responsible for all legal services to HMRC and forcorporate governance.” It is clear that the proposed settlement was in breach of both HMRC’s corporategovernance rules and the law (the courts have established in cases such as Commissioners of Inland Revenue



v National Federation of Self-Employed and Small Businesses Ltd (1981) 55 TC 133 and Wilkinson v.Commissioners of Inland Revenue (2005) 77 TC 78) that “the Commissioners’ managerial discretion is as tothe best manner of obtaining for the national exchequer the highest net return that is practicable”).

57. Nevertheless, despite Mr Inglese’s reluctant admission to your Committee that the settlement was notbinding at the time (Q313 to Q322), his legal advice to Mr Hartnett (having obtained the information set outabove during the meeting with the litigation lawyers on 8 December 2010) was “You can go back, or youcannot go back” (Q330) while his “preference was for not going back” (Q379).

58. Consequently, on 22 February 2011, on Mr Inglese’s instructions, the litigation lawyer sent the relevantwritten confirmation to Goldman Sach’s lawyers, requesting their signed copies. By virtue of regulation 11 ofthe Social Security Contributions (Decisions and Appeals) Regulations 1999, the deal on which Mr Hartnettshook hands on 19 November 2010 only became binding on HMRC on this date.

C. Forward Tax Agreement on the Vodafone Settlement?

59. You will recall that MP for North East Cambridgeshire made this crucial observation at your Committee’shearing on 7 November 2011 in relation to the Vodafone settlement:

Q586 Stephen Barclay: I think the quantum is much more important than Goldman Sachs. Between2001 and 2011, as far as Vodafone is concerned, we are looking at in the region of £25 billion inprofits. The settlement—the 30%; obviously, it came down in the latter years—seems strange on anumber of levels. First, it includes the 2011 and 2012 profit, but given that the settlement was reachedin 2010, I would welcome your thoughts on how they knew what the profit would be for 2011 and2012, given that those profits had not been realised. Also, the £1.25 billion looks like it has beenbased on about 20% of Vodafone’s profits. That means the Exchequer may have lost around £8 billionin tax, which makes Goldmans look paltry in comparison.

60. However, as explained in paragraph 3.28 of my memorandum, it is settled law, confirmed in Al Fayedand Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC1703, that the Commissioners lack the power to enter into agreements relating to future tax liabilities.

61. The case concerns a “forward tax agreement” entered into between the Inland Revenue and MohammedAl Fayed. Three successive agreements were entered into with Mr Al Fayed in 1985, 1990, and 1997 underwhich Mr Al Fayed would pay, and the Revenue would accept, a specified sum in respect of designated futureyears of assessment in full and final settlement of tax to which the Al Fayed might otherwise have been liable.The 2007 agreement covered the years 1997–98 to 2002–03 and provided for payment of a sum of £240,000per annum which represented an indexation of figures in the earlier agreements in 1985 and 1990 to takeinflation into account.

62. The Revenue had not sought legal advice, either internally or externally, before entering into anyof the three agreements. In May 2000, the Revenue received the opinion of counsel, which was to theeffect that the 1997 Agreement was ultra vires and thus not binding on the Revenue.

63. So in June 2000, the Revenue informed Mr Al Fayed that the agreement was not enforceable because itwas ultra vires but that in view of the history of the arrangements the Revenue would not re-open the issue ofliability to tax prior to 5 April 2000. However, for the years from 6 April 2000 onwards Mr Al Fayed wasrequired to complete tax returns in accordance with his normal statutory responsibilities, and without referenceto the 2007 agreement.

64. Mr Al Fayed appealed this decision but his argument that the Revenue was obliged to abide by theagreement did not find favour with the Scottish courts. Upholding the decision of the Outer House of the Courtof Session in favour of the Revenue, the Inner House held that the agreement was ultra vires. According toLord Cullen:

[73] Under taxation legislation the respondents [the Inland Revenue] have the duty of collecting taxas it falls due in respect of actual transactions. ... The respondents have no power to require a taxpayerto accept an advance assessment of his liability to tax in a future year or years. Likewise they haveno power to contract with the taxpayer as to his future liability (see Gresham Life Assurance Societyv. Att-Gen.).

[74] Next, even if the sum to be paid under an agreement between the respondents and the taxpayerwas a reasonable estimate of the taxpayers’ liability at the outset of the period covered by theagreement, it could not be taken as a measure of that liability throughout the period. ... In thesecircumstances we accept the respondents’ argument that such an agreement would involve a failureon the part of the respondents to exercise their managerial discretion, in the words of the Master ofthe Rolls in R (Wilkinson) v. I.R.C., to which we have referred earlier, “as to the best manner ofobtaining for the national exchequer the highest net return that is practicable”.

65. Mr Al Fayed’s counsel had sought to make an analogy with “back tax agreements”, the practice wherebythe Revenue negotiate a settlement with the taxpayer in relation to periods already ended, but this was rejectedby the courts. In a passage that appears to be particularly relevant to the Vodafone settlement, Lord Cullensaid this:



[76] A back tax agreement relates to a situation in which the taxpayer has already incurred the taxliability, but its amount has not been determined. Fundamental to the legality of such an agreementis that the respondents have the power to require the taxpayer to pay what is due. As an alternativemeans to the same end they are regarded as having the power, in the exercise of their managerialdiscretion, to enter into a contract with the taxpayer for a payment in satisfaction of that liability. Inthat context they have power to arrange a compromise with the taxpayer, taking into account suchfactors as may be relevant. The fact that such an agreement is within the powers of the respondentscannot confer on them a power to enter into a forward tax agreement which otherwise would be ultravires. Combining the two agreements in a single document, or agreeing that one is to form aconsideration in respect of the other, makes no difference.

66. Finally, in relation to Mr Al Fayed’s argument that even if the agreement was ultra vires, it would beunfair and a breach of his legitimate expectation should the Revenue resile from it, Lord Cullen stated:

[119] We have already reached the conclusion that, as the 1997 Agreement was ultra vires, therespondents did not have any discretion to continue to abide by the Agreement once they knew thatit was ultra vires. A decision taken at that stage to continue to be bound by the Agreement for theremainder of its contractual duration would, in our opinion, have been outwith the powers of therespondents. However, under our domestic law a legitimate expectation can only arise on the basisof a lawful promise, representation or practice. There can be no legitimate expectation that a publicbody will continue to implement an agreement when it has no power to do so. In our opinion, thepetitioners could not have had a legitimate expectation that the respondents would have adopteda course of action which was outwith their powers, and continued to maintain a contract whichwas unlawful.

67. The difficulty identified by the MP for North East Cambridgeshire, namely: how to determine Vodafone’sprofit for 2011 and 2012 in 2010, illustrates why forward tax agreements cannot be a lawful exercise of theCommissioners’ discretion as to the best and most practicable means of maximising taxes for the Exchequer.

68. However, in view of the fact that the NAO’s further work is “to examine the reasonableness of some ofthe larger settlements, probably with the benefit of some tax advice”, it should be noted that if there was aforward tax agreement on the Vodafone settlement, it would remain ultra vires and not binding on HMRC evenif the terms of settlement are not unreasonable. Regardless of their terms, forward tax agreements are by theirnature unlawful.

Conclusion

69. In conclusion, it is worth remembering that, just like the Commissioners, the C&AG has thediscretion, by virtue of section 182 of Finance Act 1989, to disclose information provided to the NAO byHMRC to your Committee in order to assist with your oversight functions.

70. In thanking you in advance for your assistance in this matter, I avail myself of this opportunity to renewthe assurance of my highest consideration.

21 November 2011

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