HM Revenue & Customs Accounts: tax disputes

Transcription

1 House of Commons Committee of Public Accounts HM Revenue & Customs Accounts: tax disputes Sixty-first Report of Session Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 14 December 2011 HC 1531 Published on 20 December 2011 by authority of the House of Commons London: The Stationery Office Limited 20.00

2 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 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 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 ; the Committee s address is [email protected].

3 1 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

4

5 3 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

6 4 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 Accounts, HC 981, Session

7 5 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

8 6 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

9 7 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.

10 8 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 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 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 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 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 HM Revenue & Customs, Annual Report and Accounts , HC 981, Session , p 59 4 C&AG s Report, paras C&AG s Report, para C&AG s Report, para 2.15 and Figure 7 7 Ev 68; C&AG s Report, paras

11 9 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 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 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 Q 49 9 Q 58; Ev Ev Qq 48-49, 60; Ev Qq Qq Qq

12 10 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 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 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 Q 486; Erskine May, 24th edition, London, 2011, pp Q Qq 25-28, Qq Qq 126, Q 33

13 11 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 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 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 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 Q Q Qq 83, Qq Qq Qq 1-7, Qq

14 12 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 Qq Qq Qq 14, Qq 260, Qq ; Qq Qq 113, Qq

15 13 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 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 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 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 Q Qq Q Q Ev Qq , 148, ; Ev Q Q Qq

16 14 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 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 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 Qq 228, 48 Q Q Qq Qq Q Qq 22, 27

17 15 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 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 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 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 Qq 719, Qq 719, Q Qq 266, 542, Qq Qq Qq 126, 269, Qq 250, Qq Qq Qq 713, 741, Qq 17-19,

18 16 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 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 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 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 Q Qq Qq Q Qq Qq Q Q Qq 190, Qq 71-72, 190, , 717

19 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 Q Qq Qq 220, ,

20 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 Johnson Fiona 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 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

21 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 Monday 17 October 2011 Ev 1 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

22 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 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 Fourth Report Tackling inequalities in life expectancy in areas with the worst health and deprivation Progress with VFM savings and lessons for cost reduction programmes HC 470 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 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 HC 801 Twenty-third Report The Major Projects Report 2010 HC 687

23 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 Thirty-ninth Report Fortieth Report Forty-first Report The impact of the changes to public service pensions Department for Transport: The InterCity East Coast Passenger Rail Franchise Information and Communications Technology in government Office of Rail Regulation: Regulating Network Rail s efficiency HC 833 HC 1035 HC 1050 HC 1036 Forty-second Report Getting value for money from the education of 16- to 18- year olds HC 1116 Forty third Report Forty-fourth Report Forty-fifth Report Forty-sixth report Forty-seventh Report Forty-eighth Report The use of information to manage the defence logistics supply chain Lessons from PFI and other projects The National Programme for IT in the NHS: an update on the delivery of detailed care records Transforming NHS ambulance services Reducing costs in the Department for Work and pensions Spending reduction in the Foreign and Commonwealth Office HC 1202 HC 1201 HC 1070 HC 1353 HC 1351 HC 1284 Forty-ninth Report The Efficiency and Reform Group s role in improving public sector value for money HC 1352 Fiftieth Report The failure of the FiReControl project HC 1397

24 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 HM Revenue and Customs: PAYE, tax credit debt and cost reduction HC 1565 Fifty-ninth Report Sixtieth Report The cost-effective delivery of an armoured vehicle capability Achievement of foundation trust status by NHS hospital trusts HC 1444 HC 1566 Sixty-first Report HM Revenue and Customs Accounts: tax disputes HC 1531

25 cobber Pack: U PL: COE1 [SO] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev 1 Oral evidence Taken before the Committee of Public Accounts on Wednesday 12 October 2011 Members present: Margaret Hodge (Chair) Mr Richard Bacon Stephen Barclay Stella Creasy Matthew Hancock Joseph Johnson Austin Mitchell Nick Smith Ian Swales James Wharton Amyas Morse, Comptroller and Auditor General, Paul Keane, Director, National Audit Office, John Thorpe, 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, Simon Bowles, 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 first on tax disputes, and then we will look at PAYE and tax credits, if we can. I am going to start with a rather tough question: it seems to me that you lied when you told the Treasury Committee on 12 September that I do not deal with Goldman s tax affairs. In preparing for this afternoon, we had access to a note of a meeting on 8 December in the offices of your lawyers which states that 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 the Hansard extract demonstrates that. I was first asked by Mr Norman whether I had had corporate hospitality from Goldman s, and I explained that I had had supper at Goldman s to speak to 20 FTSE 100 CFOs with one of my managing director colleagues from the Treasury. I went on to say that I do not deal with Goldman s tax affairs. I met Goldman s on a single occasion, on 19 November 2010, when I had been asked by two of my colleagues to assist them with a difficult relationship issue. I have no deep knowledge of Goldman s tax affairs. I have never worked in a normal way, in my understanding, dealing with their tax affairs on an everyday and routine basis. I have never done that. Q2 Chair: The minutes of the meeting in Anthony Inglese s office at 100 Parliament street on 8 December 2010 say that a late submission had come in about a deal on which DH you had shaken hands with GS, which is Goldman Sachs. Is that a lie? 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 was at a meeting on 19 November with two of my colleagues 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 did you 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 do not deal, as my colleagues deal on a regular basis, with Goldman s tax affairs. I attended the meeting on 19 Q7 Chair: This is a big bit of Goldman s tax affairs, for heaven s sake! This is a dispute on which you personally negotiated the settlement, yet you told the Treasury Committee, I do not deal with Goldman s tax affairs. Dave Hartnett: I am very sorry, Chair, but I did not negotiate the settlement on my own. I went to help the resolution of the issues. Q8 Chair: So the minutes of the meeting with Anthony Inglese, Alan Evans, John Sandford and Dean Rowland all HMRC people, I assume are not true.

26 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml 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 not at the meeting. Mr Inglese saw the minute for the first time on Monday of this week. Q9 Chair: That is laughable. I shall read you more about this meeting: It was not clear whether DH you had settled on 24m or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation Strategy It was, however, clear that the proposed settlement gave GS no additional penalty for having resisted for 5 more years, including as DR that must be Dean Rowland explained raking every conceivable point in the Tribunal. At the end of this minute, it says, AI Anthony Inglese said he would always want to assist DH, but not if this were unconscionable. Dave Hartnett: Well, I ve read the minute. I don t think 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 this meeting were having in justifying a settlement without an interest element. It is pretty clear to me. Q10 Mr Bacon: What I don t understand about this is that this is one of your top lawyers. What is the position that Anthony Inglese holds? Dave Hartnett: He is our general counsel and solicitor. Q11 Mr Bacon: So he is a very important lawyer within HMRC? Dave Hartnett: Yes. Q12 Mr Bacon: And he was at the meeting, and it wasn t clear to him at the meeting, apparently, whether you had settled on 24m or on whatever the principal was. There was then a discussion about whether there could be justification for settling without interest. Now, this note is dated 8 December. What date did your meeting with Goldman Sachs take place? Dave Hartnett: I believe that it was 19 November. Q13 Mr Bacon:19 November. I read in the newspaper that it was 30 November or was it at a subsequent meeting where they discovered your meeting that had taken place on the 19th? Perhaps that is the way round it was. But you think that you met on the 19th? Dave Hartnett: I believe so. Q14 Mr Bacon: And was there a note of what was agreed 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 on behalf of HMRC Dave Hartnett: No. I don t want to be difficult, but you keep saying that I was negotiating a deal. I went to assist my colleagues to deal with a very difficult relationship issue. One of the things that I did to assist the relationship issue was to persuade someone to come in from New York from Goldman s, because it was quite clear that elements of the relationship in the UK had broken down. Chair: I have to say to you, Mr Hartnett, that your officials say that you shook hands and it was your settlement. Your name is all over this note. Q17 Mr Bacon: I don t understand how there cannot be a record from the HMRC side of the meeting. That you don t know whether there was a record or not of the meeting is astonishing. Dave Hartnett: Well no, because the other HMRC people at the meeting were the head of our banking sector in the large business service and the case relationship manager with the bank. They are people who were managing the issues and would have made the 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 a bank in a fairly junior capacity and one of the things you always did without fail was to take a note of a meeting. That was just normal practice. First of all, you answered by saying that you didn t know whether there was a note. Then you said that there would have been a note. Then you said that you haven t seen it. Yet this was an extremely important meeting with some very top people there: your large business guy; your client guy; you, the senior official in the entire organisation and you are telling us that you didn t see a note of the meeting afterwards. Dave Hartnett: No, I didn t. I left the country shortly afterwards to go and visit another Government. Q20 Mr Bacon: And yet we now know that that was the date upon which this agreement was struck, which subsequently your top lawyer seems to be having some difficulty with, because he wants to assist you wherever possible, but not if it is unconscionable. The problem that he, and the meeting, appeared to have indeed, the wording in the note is all present, I think Chair: It says: He referred to the difficulty all those present at this meeting were having in justifying a settlement. It is the last sentence. Q21 Mr Bacon: Yes, all those present at the meeting were having difficulty in justifying a settlement without an interest element. This appears to be the bone of contention, because you ended up agreeing a settlement 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 have not seen a note of the meeting at which that decision was made, with your imprimatur not to pursue them for the interest. Subsequently your top legal people are saying that they are very uncomfortable with it

27 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev 3 12 October 2011 HMRC and HM Treasury and that they cannot assist you with something that is unconscionable. Dave Hartnett: Well, I would never want them to assist me with anything that is unconscionable. Q22 Mr Bacon: The whole thing sounds extremely odd, Mr Hartnett. Dave Hartnett: Well, when I answer questions from Mr Norman I have to be careful I expect we will get on to taxpayer confidentiality shortly with what I say, because I cannot breach taxpayer confidentiality. But if you look at the transcript of the TSC hearing, I make it clear that there was an issue in relation to which a mistake was made, because we saw an impediment to dealing with an issue. In fact, the impediment had been removed. A number of us at the meeting did not know that. Q23 Chair: That sounds like a bit of gobbledegook. Was the taxpayer ripped off in the deal that you did with Goldman Sachs? Dave Hartnett: Absolutely not. Q24 Chair: Did we lose 10 million that we should have had? Dave Hartnett: The sum is smaller than that. Q25 Chair: What was it? Dave Hartnett: I am sorry, but I am now in grievous difficulty of breaching taxpayer confidentiality. Q26 Chair: Well, the figure in the public domain is 10 million. Our duty as a Committee is to ensure that you provide value for money in the work that you do in settling tax disputes. There is a lot of money at stake. There is 25 billion outstanding in tax disputes. Therefore, in the same way that we delve into the detail when we look at the development of fire stations or whatever, we will delve into the detail here. It appears that 10 million was lost to the taxpayer because of the deal that you did with Goldman Sachs. Dave Hartnett: Well, I m sorry Q27 Chair: We were ripped off. The taxpayer was ripped off. That is what it feels like. Dave Hartnett: No, I do not agree with that at all. A mistake was made. Papers have appeared in the media. Q28 Chair: How much did we lose on the back of a mistake made? Dave Hartnett: Chair, I cannot answer a specific question about that. Q29 Chair: The difficulty is that our duty as a Committee is to ensure value for money for the taxpayer. My problem with this, and in reading all the papers preparing for today, is that you are the guy who does the deals, you are the guy who sits on the board that vets the deals, you are the commissioner who vets the deals and you are the guy who decides what comes into the public domain. The NAO does not look at the details, so there is nobody checking on whether the deals that you personally do provide value for money for the taxpayer. It is an outrageous, unprecedented situation. Dave Hartnett: With enormous respect, I do no settlements on my own. Q30 Chair: We don t know that nobody knows. The minutes we have are of a meeting either they are lying, or there are lies around the place where the minutes clearly say to me that you made that deal with Goldman Sachs. Dave Hartnett: Well, I am sorry, but not one person named in that minute was there. There were a number of people in the room. I did not do a deal personally. Q31 Mr Bacon: You may not be the only person in the room, but it is an odd state of affairs when your own chief lawyer your own general counsel has serious concerns about what you appear to have done. In the case of Vodafone, it was clear in the controlled foreign corporations case there that the experts inside HMRC who knew the law on that issue were excluded from the meetings. They were explicitly not consulted. Here you are doing a deal where you forwent the interest. Presumably, in the earlier days, one of the aspects of the dispute was that you wanted the interest if they continued to resist. Dave Hartnett: Of course. Q32 Mr Bacon: Did HMRC warn Goldman Sachs that if it continued to resist, it would continue to be liable for the interest? Dave Hartnett: The interest was always in our mind, Mr Bacon. Q33 Mr Bacon: Did HMRC warn Goldman Sachs that it would be liable for interest if it continued to resist? Dave Hartnett: I am sorry, you are asking me to cross the margin of taxpayer confidentiality again, but maybe I can pick up the prior point you made. As we have said before, on the Vodafone case, at no stage did I or anyone else stand down experts. Our foremost experts were involved in the matter. Q34 Mr Bacon: Let me help you on this question of the warning. HMRC did warn Goldman Sachs that if it resisted it would be liable for the interest; that was in the letter written by HMRC to Goldman Sachs in And yet here we are, five years later, and you just, with a wave of the hand, agreed. Despite the fact that it had resisted enormously and all the other people involved in this type of scheme and the other users of the scheme basically fessed up and settled Goldman Sachs held out and does not pay any extra penalty. This is one of the things that Mr Inglese and his colleagues in the meeting were so concerned about. As the Chairman quoted earlier: It was clear the proposed settlement gave GS no additional penalty for having resisted for 5 more years. As Dean Rowland explained, Goldman Sachs was raking every conceivable point in the Tribunal, and putting up a stooge witness when Mr Housden a Goldman Sachs official was the obvious person to answer questions. It did not suffer any penalty for that. For

28 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 4 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury the avoidance of doubt, what we are talking about here is a scheme whose purpose was to ensure that extremely rich and extremely highly paid people paid less tax and national insurance in this particular case on their bankers bonuses than would otherwise have been the case. I do not think that this type of deal would have been available to a medium-sized company of 150 employees in my constituency, would it? Dave Hartnett: Mr Bacon, what I have made clear already Q35 Mr Bacon: We are supposed to be equal before the law. Dave Hartnett: That is a principle of HMRC. There was no wave of the hand. There was no pushing aside of interest in order to secure a deal. That is not what happened. Mr Rowland was not there; nor was anyone else. A mistake was made and it was actually me who took the mistake to Mr Inglese. Q36 Chair: A mistake was made that cost the taxpayer what? Dave Hartnett: I cannot answer that, Chair. Q37 Chair: I will go to Austin, but first I will say one final thing before I hand over to Austin. I still assert that in whatever role you played with Goldman Sachs you clearly played a role, as you say, alongside others you lied to the Treasury Committee in saying, I do not deal with Goldman s tax affairs. You did not say, I do not solely deal with Goldman s tax affairs. You said, I do not deal with Goldman s tax affairs. You did, and that was a lie. Dave Hartnett: No, it was not, with respect. I do not deal with Goldman s tax affairs. I do not know about its tax provisions, how much tax it pays generally Q38 Chair: Wasn t this negotiating? This is really playing with words. This negotiation was dealing with Goldman s tax affairs. It was dealing with a really important part of Goldman s tax affairs. Dave Hartnett: I went to the meeting to make the relationship work. Q39 Mr Bacon: But the point the Chairman is seeking to make is that less than a year before you told the Treasury Committee I do not deal with Goldman s tax affairs, you have been in a meeting in which you have dealt with Goldman s tax affairs. That is 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 of business to deal with Goldman s tax affairs on a month by month or week by week basis. That s not my job. But occasionally I have got involved. That might have been a more accurate way of putting it, but it is not what you said. You just said, I do not deal with Goldman s tax affairs, when in fact you had. Chair: It is even worse. You said, I knew nothing of Goldman s tax affairs, but you had been at a meeting to discuss it. Mr Bacon: When I was at that supper may have been true for all we know. But the next sentence, I do not deal with Goldman s tax affairs, was not a true sentence. It should have been qualified; it was not a true sentence. Dave Hartnett: I am really sorry. In the cut and thrust of the hearing, I said I knew nothing of Goldman s tax affairs when I was at that supper. I do not deal with Goldman s tax affairs. I do not deal with Goldman s tax affairs in the way I have dealt with hundreds of thousands of people s tax affairs during my career. Q40 Nick Smith: So what were you assessing at that meeting apart from Goldman s tax affairs? Dave Hartnett: The fact that the relationship had broken down and that the issue was not being moved forward. My colleagues dealt with Goldman Sachs. Q41 Nick Smith: But the nub is you were talking about the tax affairs. Dave Hartnett: With respect, Mr Smith, I did not have the deep knowledge to deal with Goldman s tax affairs. I did not make a deal. I did not wave interest away. Q42 Austin Mitchell: But you cannot be surprised that we find it inconceivable that you can go into a meeting with Goldman Sachs which is not, after all, a charity for handing money to impecunious bankers 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 into meetings ignorant I try very hard not to do that. I did not force myself into that meeting or anything like that, I was asked by my colleagues for assistance and I sought to provide it, mainly with the relationship issue. My colleagues were seeking to settle something. Q43 Austin Mitchell: Relationship advice. That is very interesting. Perhaps you would give us some information here, because the Chair has asked for an estimate of how much was given away to Goldman Sachs. My understanding is that we are talking about 22 million that was not paid in national insurance contributions on bankers bonuses. What would the interest on that be, and how long was the period involved? Dave Hartnett: I cannot answer that question. Q44 Austin Mitchell: Well, can you give us a note stating the number of years involved, the rate of interest that would be charged and the amount of interest written off? Dave Hartnett: I don t know whether I can give you a note I don t think I can, because I think the law prevents it. Q45 Chair: I know Jo wants to come in on this, but I shall just tell you why this is deeply irritating. We are trying to find out whether the work you do provides value for money. You are hiding behind confidentiality 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 that context. It is all in the public domain, it is protected

29 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev 5 12 October 2011 HMRC and HM Treasury anyway and, by answering, you would help us to decide whether or not you and your team provide value for money. Do not hide behind confidentiality. Dave Hartnett: Before I came here, I put together for myself a mental profit and loss account of the issues that I and my colleagues have dealt with over the past five years. The mistake that was made, for which I and my colleagues are very sorry, is one thing; the income side of this is billions of pounds. It may be helpful if I say something about the legal position. Chair: We will come to that, but people want to pursue this point. Q46 Austin Mitchell: Can I pursue it? You had given Goldman Sachs a huge competitive advantage. All its competitors coughed up in 2005, but you gave it the full use of all that money from 2005 to the date of settlement. That is a big advantage given to Goldman Sachs you would not give such an advantage to any small business that is hounded and punished for interest payments. Let me move on. There is a great similarity between that deal with Goldman Sachs and the one you reached with Vodafone. In each case, the interest was not charged. Why was that? Dave Hartnett: Well, I gave to the Treasury Select Committee an example a particular example of the circumstance in which interest would not be charged. I face the same difficulty, Mr Mitchell, with your Vodafone question as I face with your Goldman Sachs one. I cannot talk to the Committee about the affairs of an individual Chair: Would you talk to us in confidence? Q47 Austin Mitchell: Perhaps you could give us the interest on the Vodafone affair. I remind you that the advice given to HMRC from leading tax silk Malcolm Gammie was that it could recover the dodged national insurance if it went to court. That meant that, under its own litigation and settlement strategy, it must not reach an out of court settlement for less than 100% of the tax and interest at stake. In other words, you are cutting right through defying your own department s strategy on tax settlement. Dave Hartnett: Mr Mitchell, I am sorry that this has arisen, but the really difficult issue is truly and I say this in all conscience that a mistake was made. It was 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 a minute? I am literally looking at the Wilberforce and Scarman judgments that point out that the laws of the United Kingdom have long struck a public interest balance between taxpayer confidentiality and the Revenue s official secrecy on the one hand and accountability and taxpayer confidence in the administration of the tax system on the other, so it is not an absolute. In fact your own legal advice says that it is not an absolute duty against disclosure and you have discretion in the exercise of your functions. That is true isn t it? Dave Hartnett: There is discretion in relation to our functions, but maybe I can set out Q49 Mr Bacon: One of your functions is ensuring that the public have confidence in the tax system and that you are able to account to Parliament as accounting officer or at least your colleague, Lesley Strathie, is able to account to Parliament as accounting officer for the effective, efficient and economic administration of the tax machinery, so plainly you could make a very good case for saying that in certain circumstances disclosure is required. It is not a difficult conclusion to reach. Dave Hartnett: The Commissioners for Revenue and Customs Act 2005 sets out very clearly public interest and similar issues. Our view, which we have been through with our own lawyers and legal counsel, is that we are prevented from disclosing information and that these provisions reflect earlier provisions and that is a well established policy here. There are gateways and section 18 of the Commissioners of Revenue and Customs Act provides greater strictures than we had before. The key, Mr Bacon, is that there is no specific gateway that enables the disclosure of information to parliamentary Committees and our advice is that I or any other official in HMRC disclosing specific taxpayer information to a Committee is in jeopardy of committing a criminal offence. Q50 Stephen Barclay: May I just pick up on that point? I think it goes to the nub of whether you are prevented by law from discussing individual cases or whether it is your choice. In your evidence a little earlier, you said, I don t think I can, because the law prevents it, whereas at the Treasury Committee you were a bit clearer. You said that you cannot talk about it in other words, you were prevented legally and, twice in the last 10 days I have been to see our most senior lawyers to see whether there was anything you could do, so even if you wanted to, you were prevented. Again you said that you were prevented by law. Perhaps we can work our way through it. Section 18(1) prevents disclosure except in the circumstances described in subsection (2). That is correct, is it? Dave Hartnett: Yes. Q51 Stephen Barclay: Okay, so if we then look at subsection (2), it says that disclosure is permitted, and this is the point that Richard alluded to, if it is made in connection with a function of the Revenue and Customs. Is that correct? Dave Hartnett: Yes. Q52 Stephen Barclay: One of those functions is to assist Parliament. Is that correct? Dave Hartnett: Let me just have a look at the list of functions. Q53 Stephen Barclay: One of the functions of Revenue and Customs is to assist Parliament. Dave Hartnett: Could you point to that in the list of functions, Mr Barclay? Q54 Stephen Barclay: I ll go one better. I ll quote from the first Treasury counsel, who said in the minutes to the meeting dated 23 June 2009, paragraph 6, In any case, we sought legal advice from First

30 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 6 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury Treasury Counsel. He advised that as PAC are a parliamentary body with an oversight role over HMRC it follows that HMRC s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure but this would still be at HMRC s discretion. The first counsel is making the point that I am making, which is that a function of HMRC is to assist Parliament. Is that correct? Dave Hartnett: Mr Barclay, I have to say to you here and I fear that you are not going to like this answer that I am unable to discuss the legal advice of Treasury counsel. Q55 Stephen Barclay: I am not asking you to discuss the legal advice, Mr Hartnett. I am asking you to explain whether a function of HMRC is to assist Parliament. I am not even asking you about this specific issue. I am asking you about whether a function of HMRC, as first Treasury counsel advised, is to assist Parliament. It is a very straightforward question. 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 your functions is to assist Parliament? Dave Hartnett: Mr Bacon, I want to be as open as I can. I am sitting here with advice Q57 Mr Bacon: You are here now, assisting us. It is plainly one of your functions. It is obvious why even discuss it? It is obvious that one of your functions is to assist Parliament. Dave Hartnett: Because the same advice that Mr Barclay has quoted from I have no idea whether you have the full advice, because this material appears to have been leaked says that providing information about specific taxpayers will put officials in jeopardy of prosecution. Q58 Stephen Barclay: With respect, that is a different point. I note that, at the Treasury Committee, three different members complained to you about what they termed Sir Humphrey answers. I was asking a very straightforward question; I was not asking about the wider legal advice. Is a function of HMRC to assist Parliament? It stands to reason that the answer is yes or no. Dave Hartnett: I believe it is a function of HMRC to assist Parliament. Q59 Stephen Barclay: Okay, thank you. If it is a function of HMRC to assist Parliament, there is nothing in the 2005 Act that legally prevents you from discussing an individual case, which is contrary to the advice given to Edward Leigh, the former Chairman of the Public Accounts Committee. Dave Hartnett: I am sorry; I did not understand that. Q60 Stephen Barclay: The letter that was sent in 2009 to Mr Leigh specifically cited section 18 of the 2005 Act as the grounds on which you could not disclose individual cases to the Committee. What you have just said to us is that a function of HMRC is to assist Parliament. The 2005 Act does not prevent you from discussing individual cases that relate to a function of revenue. Therefore, there is nothing in the 2005 Act, as I understand it, that prevents you; it is your choice whether you do so, but you are not legally prevented from doing so. That is correct, is it not? Dave Hartnett: If I may read out section 18 fully, it says, is made for the purposes of a function of the Revenue and Customs, and does not contravene any restriction imposed by the Commissioners. The commissioners of Revenue and Customs, when Q61 Chair: That s you. Dave Hartnett: There are others. Q62 Chair: Yes, but you re a commissioner. Don t pretend that they are separate people. Dave Hartnett: I am certainly not suggesting that I am not a commissioner. When this was put to the commissioners and, indeed, to our executive committee, they took the view, on advice, that the strict rule of taxpayer confidentiality which I expounded for the TSC and here today was their understanding of the position. The Mr Eadie advice, which you appear to have, makes it clear as well that none of this is free of difficulty. Q63 Stephen Barclay: Again, that is a different point. My point is that, in law, you are not prevented by the 2005 Act from disclosing this information. It is entirely at your discretion whether you wish not to disclose information, but you are not prevented in law from doing so. Dave Hartnett: My advice, Mr Barclay what I would like to do, because it seems to make more sense, is write to you fully. Q64 Stephen Barclay: But you have already consulted on this issue. You even spoke twice before seeing the Treasury Committee, at which point you said, after talking to the most senior lawyers you took a special interest in this before that you were prevented legally. Having had that advice and after telling the Treasury Select Committee that you were legally prevented, now you are saying that perhaps that advice is not correct and that you need to speak to lawyers again. Dave Hartnett: No, I am not saying that at all. I am saying that that is my advice, and my advice has not changed the advice I have received. Q65 Chair: So writing to us will simply confirm what you are saying. Dave Hartnett: I am offering to write fully around the considerations that I have discussed with our lawyers and to explain the advice that I have received. Q66 Chair: Well, we welcome that, but I do not think it takes us further. I ll come back to you later, Stephen. Q67 Joseph Johnson: I just want to go back to Goldman, if we can. The 24 million that seems to be at stake here is a small proportion of the 25.5 billion of outstanding potential tax that is at risk. It is 0.1%, if my calculator is correct. It surprises me that your

31 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev 7 12 October 2011 HMRC and HM Treasury personal intervention was necessary for such a relatively trivial sum. Why doesn t your Department have the capacity to deal with such trivial sums in the context of the outstanding amount without your personal intervention? Dave Hartnett: There are two or three things that I could say. First, I am the head of tax, and my colleagues consult me regularly. I do not normally get involved with issues such as 24 million. There was a huge relationship issue, and from my previous work, I happened to know someone who I thought could unlock it, and that person flew in from New York. Q68 Joseph Johnson: You weren t talking about the tax affairs per se you have already made that clear but you were talking a lot during that meeting. How long did it last? What were you talking about? What was the personal relationship that was so important to the successful management of the tax affairs of Goldman Sachs that it required your personal intervention? Dave Hartnett: From memory, the meeting was a couple of hours maybe a little longer, maybe a little shorter. The relationship between our team and the Goldman s team had got into a bad place. Q69 Joseph Johnson: In what sense? Dave Hartnett: The teams weren t getting on with each other; they weren t making any progress; and there was no meeting of minds on any issue. Q70 Chair: You had dinner with Goldman Sachs on 19 May 2009, and you also had lunch with Goldman Sachs on 25 July 2008, yet it is so small in terms of outstanding liability. Dave Hartnett: Neither of those had anything to do with Goldman s as such. The supper it was hardly a dinner was about explaining developments in international tax practice to 20 chief finance officers, and the lunch was on private business with somebody with whom I set up the business tax forum. Q71 Chair: Is it sensible to have lunch and dinner with people with whom you are in dispute? Dave Hartnett: Do you know, I had no idea we were in dispute at that time. Q72 Joseph Johnson: It surprises me that it is that important for there to be buddy-buddy relations between 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 the straightforward application of the tax code? Dave Hartnett: That is exactly what we were trying to do. Q74 Joseph Johnson: And why does that require amicable relations between HMRC and Goldman? Dave Hartnett: It doesn t particularly require amicable relations; it requires the dispute to be managed in an orderly way. That is what I was trying to facilitate. Q75 Joseph Johnson: But the tax code is set down in legislation. It is relatively simple to apply, is it not? Dave Hartnett: Surprisingly enough, no. Q76 Joseph Johnson: Why did it require your personal intervention to repair a human relationship? Dave Hartnett: My colleagues asked me to help, and I agreed to do so. That is part of my role. Q77 Joseph Johnson: You mentioned that you flew someone in from New York. Was that an HMRC person? Dave Hartnett: No, it was the global head of tax at Goldman s. Q78 Joseph Johnson: Who you requested to attend the 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 Goldman stuff, did you personally sign off the Goldman Sachs settlement? Dave Hartnett: No, the Goldman tax settlement was delayed but went through a governance process in which an error was found. It was then considered by commissioners and by other senior officials. Q80 Joseph Johnson: Did one of the commissioners sign it off, and were you one of those commissioners? Dave Hartnett: I was. Q81 Joseph Johnson: How many other commissioners were involved in signing it off? Dave Hartnett: One other. Q82 Joseph Johnson: So you oversaw the process by which the settlement was arrived at, and you were then 50% of the commissioners who agreed that it was a fair settlement? Dave Hartnett: Yes. Q83 Joseph Johnson: The Goldman Sachs settlement was, therefore, one of the four large tax cases in which you bypassed your own governance arrangements? Dave Hartnett: I can t answer that question. Joseph Johnson: It self-evidently is. Dave Hartnett: We really did not bypass our own governance arrangements. For those cases, we set up bespoke governance arrangements because people Joseph Johnson: Bypassing your own governance arrangements. Dave Hartnett: Because the people who sit on the high-risk corporate programme board were all people involved 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, this high-risk corporate board. Dave Hartnett: Yes. Joseph Johnson: To enable a bit of objectivity to be given to big settlements, to enable people to step back and say, Is this really a fair settlement for the taxpayer?

32 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 8 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury Dave Hartnett: Yes. Q85 Joseph Johnson: In a number of the largest tax cases you decided to bypass that special arrangement, which you had set up specifically for that purpose. Could you please explain why you decided to bypass that governance arrangement, which had been specifically set up to deal with exactly the case that Goldman Sachs presented? Dave Hartnett: I think I have, but let me go back again. We set up for each of those large cases the role of inquiry co-ordinator: someone who would manage the case. We used very senior people to do that, and many of those senior people actually sat on the highrisk corporate programme board. Given their involvement in the case, we decided that bespoke governance arrangements could apply, and that is what we did. Q86 Joseph Johnson: Did you need to seek anybody s authority before giving yourself a waiver on the need to apply the standard corporate governance arrangements? Dave Hartnett: Well, one case had started before the high-risk corporate programme was set up. One was outside the high-risk corporate programme I think two were actually outside the high-risk corporate programme. The high-risk corporate programme is not just 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 making significant progress on cases that had been going on for a long time, or where disputes were particularly difficult. Q87 Joseph Johnson: Did you need to consult anybody before you took Goldman Sachs outside the normal mechanisms? Dave Hartnett: We didn t take Goldman Sachs outside the normal mechanism. Q88 Chair: You did. You took them outside your defined strategy. You could have got 100% back and you did not. Dave Hartnett: We made a mistake on one issue. Q89 Joseph Johnson: You took them out of the high-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 large company and a large case, a large taxpayer, it would have been inside that. Dave Hartnett: No; we make decisions carefully about the cases that are inside the programme, and they were not inside the programme. Q91 Joseph Johnson: Why? It is a large company and a big taxpayer, one would hope. Dave Hartnett: I am sorry, Mr Johnson, you are taking me where I cannot go again. I would need to tell you something about an individual taxpayer to answer that, but the case did go Q92 Chair: The important thing that Mr Johnson is asking, which the Committee would like to know, is whether you gave yourself authority to waive what appears to be the procedures you should have followed in this particular case? Dave Hartnett: No; I did not manage the taking or not taking of this case to the high-risk corporate programme board. I was not involved in that. I was not in the country. Q93 Chair: But according to the minutes of the meeting we have, it was your decision, and you were one of the commissioners. You were involved. You might have been out of the country on the day of the meeting, but you were involved because you were one of the commissioners that signed it off. Dave Hartnett: The case was taken to the high-risk corporate programme board as a governance mechanism. It was not inside the high-risk corporate programme as a case. We use the high-risk corporate programme Q94 Joseph Johnson: You are giving contradictory evidence. Dave Hartnett: I am trying not to, but help me if I have. Q95 Joseph Johnson: You have been saying quite clearly to me for the past few minutes that it was not ever in the corporate high-risk programme, and you are now saying it was taken into it as a governance mechanism. Dave Hartnett: Simply for the governance. Q96 Joseph Johnson: But then it was taken out of it again. Dave Hartnett: The matter was referred to the commissioners. Q97 James Wharton: Just on some of the evidence that you have already given us this afternoon, Mr Hartnett, you said that when you met Goldman Sachs and went to a lunch and a supper, you did not know that HMRC was in dispute. Dave Hartnett: Yes. Q98 James Wharton: The employee benefit trust issue affected a number of companies, did it not? Dave Hartnett: Yes. Q99 James Wharton: HMRC resolved it in Dave Hartnett: Yes. I oversaw that. Q100 James Wharton: And is it true that 21 companies held their hands up and said, We accept what the court has said, and we will pay, and Goldman Sachs was the only one that did not, at that time? Dave Hartnett: I think the number was slightly larger. I think there was another that couldn t, rather than didn t, settle, and then I think what you said is fair. Q101 James Wharton: Yet you did not know that there was an ongoing dispute. I just want to understand why you did not know. You oversaw this.

33 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev 9 12 October 2011 HMRC and HM Treasury Everybody else either settled and paid up or said, We cannot, for a variety of reasons. Goldman Sachs had not and was fighting tooth and nail not to, and yet you did not know that there was a dispute. Dave Hartnett: I was dealing with numerous other tax issues at the time. I went to Goldman s to lunch to see a Q102 James Wharton: I don t dispute any of that, but you said very specifically in your evidence this afternoon that you did not know that there was a dispute. Is that is accurate. Dave Hartnett: I think it is, Mr Wharton. It was certainly 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 dispute what has been in the media. Dave Hartnett: I do. Q105 James Wharton: The media imply that there was handshake meeting between yourself and Goldman Sachs that led to a resolution. My understanding of your evidence is that there was a meeting about relationships, but not about that specific issue. Can you tell us who was at that meeting? Was David Goldberg at that meeting? Dave Hartnett: Goodness the people at the meeting from HMRC were the head of the banking sector and the large business service and the relationship manager for Goldman s. There were three representatives of Goldman s. This is terribly difficult. My advice is that I cannot name them. There was no one else. Q106 James Wharton: You say that you cannot name them. Is that off the top of your head or is that because you just do not know? Dave Hartnett: No, my advice is that that is taxpayer confidential information. Q107 James Wharton: So you cannot because of the advice that you have been given. You cannot tell us whether David Goldberg was there. Dave Hartnett: No, I think I have given you the answer to that slightly obliquely. Three Goldman s officials and three HMRC officials were there. Q108 James Wharton: Okay. Did you ask for a briefing before you went to that? Dave Hartnett: I did. I had a briefing a day or two before. It was a short briefing. Q109 James Wharton: Did that briefing mention the detail of this ongoing dispute? Would it normally? Dave Hartnett: It mentioned certain details of the issues that were going to be discussed. Q110 James Wharton: I want to ask a slightly different question. You have said several times that a mistake was made. Although I appreciate that you do not feel that you can reveal the quantum of the cost of that mistake, it had a cost to the Revenue. Who made that mistake? Dave Hartnett: I was the most senior person there. I am entirely responsible for it. Q111 James Wharton: If you make a mistake in most walks of life that ends up costing, say, a private company a significant sum of money, there would be some sort of disciplinary action. What disciplinary action has been taken in respect of that mistake? Dave Hartnett: None. Mr Wharton, we learn from our mistakes as an organisation, and we have learned from this one. Q112 James Wharton: I need to understand that. I accept that if the mistake is in the framework that exists, you would therefore amend the framework, but if it is a mistake by an individual, who for whatever reason has not done their job properly, you would expect some sort of action to be taken against that individual who made the mistake or the responsible person if they were taking responsibility. Was it a mistake in the framework that existed in the systems at HMRC? If it was, what has changed? Or was it a mistake by an individual, and if so, why has no disciplinary action been considered against that individual? Dave Hartnett: A mistake about what seemed to be a legal impediment was made by a number of people, and we have made sure that a mistake like that cannot be made again. Q113 James Wharton: Just for absolute clarity, has any disciplinary action been taken against anybody as a result of that mistake? Dave Hartnett: No. Q114 James Wharton: But you have amended your procedures so that that cannot happen again. Dave Hartnett: We certainly have. Q115 Matthew Hancock: I just want to follow up on exactly that point. People make mistakes. You cannot reveal to us the numbers that you were looking at relative to the mistake, which I think would be helpful not least to you to put this into context. Dave Hartnett: Absolutely. Q116 Matthew Hancock: But I am worried about the accountability around this. There are procedures in place to ensure that you cannot make public an individual company s tax position. But what I am concerned about is that the system ensures that, when mistakes like this are made, they are learned from and that the people who make them are held responsible. How many mistakes of this scale are made? Dave Hartnett: With respect, Mr Hancock, we have not got anywhere near the scale issue yet, but we are not an organisation that is prone to making mistakes. Chair: We don t know. People have no idea. Q117 Matthew Hancock: So how many mistakes of a scale in the millions are made by HMRC each year?

34 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 10 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury Dave Hartnett: Few, because often we are able normally we are able to intervene to correct them because they are spotted by the process. I spotted the mistake here. Q118 Matthew Hancock: After it had been made. And what process is there to ensure that those not responsible for the mistake can hold to account those who are responsible for such mistakes? Dave Hartnett: There are line management issues in there that are important. We expect our managers, when mistakes are made, to ensure that people learn from them. I think, Mr Hancock, if I may, there is another important issue here. You have the NAO report and the NAO report found just two errors in procedure in their work. They looked at 27 cases involving hundreds of issues. I am not suggesting for a moment that the NAO did a detailed review of tax issues. Their report makes that clear. The NAO report generally gave HMRC a good write-up for our governance and how we manage these large Chair: I have to say Q119 Matthew Hancock: One last question. Do you think the accountability through the NAO report, like that, is sufficient? In these questions of large sums of public money, is there sufficient accountability, given the constraints on the ability to have a public accountability for your actions in this sort of area? Dave Hartnett: What I was trying to offer you, Mr Hancock, is the independent view of how we govern these issues. You asked me what the framework was like. I think we have a sound framework. On this occasion, a mistake was made. Q120 Chair: Can I ask the Comptroller and Auditor General: do you think the loss to the taxpayer after 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 our report 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 the belief that interest was applicable or mistakenly thinking that interest was not applicable. The range of the error not simply the amount of tax that might have been involved that it is reasonable to give is between 5 million and 8 million. However, and having been a tax person myself many, many years ago, negotiating much smaller settlements I have never negotiated anything of this size I know that a lot of factors will be involved in this settlement. If the interest had been on the table, it does not follow that because the interest was not considered, as it clearly should have been, the settlement would necessarily have fully reflected that in increased quantum. Q122 Chair: Did the taxpayer get value for money out of the settlement that was made with Goldman 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 factors is taken into account and there is give and take. If it was really an open-and-shut negotiation forgive me I am talking from very out-of-date experience. If it was really open and shut, it would be open and shut. It is not as simple as that. There must be a sustainable argument on the side of the taxpayer if there is any prolonged negotiation. Q124 Mr Bacon: Can I just pick up on that very point? Twenty-one of the 22 scheme users realised that it was open and shut and paid up. The litigation and settlement strategy is very clear. We had this conversation with Lesley Strathie last year on this very point. Where the character of the case is all or nothing, and the question is merely, Does the law apply or not?, the strategy says clearly that you should settle for 100% and you should not take down. They took down, in circumstances where it was quite clear that interest was applicable. Not only that, HMRC had actually warned Goldman Sachs that if it persisted in resisting, which it did for five years with a lot of spurious arguments in front of the tribunal with stooge witnesses, that interest would be liable. HMRC itself had told Goldman Sachs that interest would be liable; that is the context. Amyas Morse: Well, not necessarily. Setting aside for a minute whether we are talking about Goldman Sachs, if in a multi-factor settlement there was an admitted mistake in taking into account entitlement of interest, I am simply making the point that if you say, That amount of mistake is exactly the amount of tax lost, it is a little bit simplistic. There was a composite settlement. I think that is all I can say. Q125 Matthew Hancock: Are you saying that the cost due to this mistake is 5 million to 8 million? Amyas Morse: I am saying that the quantum of the mistake was 5 8 million. Paul Keane: The financial error was 5 8 million. Q126 Stephen Barclay: Why was the mistake binding, if this was an informal meeting, unminuted, with just a very brief document in advance? Dave Hartnett: You are taking me to the margin of what I can and cannot say, Mr Barclay, but I am going to try. When I recognised the mistake, the first person I turned to was Anthony Inglese as our solicitor and general counsel, to ask the very question you have asked. Here is where I m afraid I frustrate you. There were a number of issues to be taken into account. Mr Inglese said to me that there were two entirely acceptable approaches in law; one was to stay with the proposed settlement and one was to put it to one side. There I have to stop, because I begin to talk about Q127 Stephen Barclay: Okay. Were those discussions minuted? Dave Hartnett: I don t know the answer to that. I received all of the advice.

35 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC and HM Treasury Q128 Stephen Barclay: So you did not even get written advice. Dave Hartnett: I received it all. All legal advice is good advice. Q129 Stephen Barclay: I am not saying it was not good; I don t know because we cannot see it. Chair: We are trying to find value for money for the taxpayer. Ian Swales: To come at this from a different angle, you will be pleased to know I am not going to ask about Goldman Sachs. Chair: If you are going on to something different, let us finish. Q130 Ian Swales: No, I am coming at the same point but from a different angle. You said earlier that when you thought about this mistake, and you thought about your profit and loss account, you knew about the mistake but on the plus side there were billions. Can you say what you mean by that plus side being billions? 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 mistake was made. My colleagues may want to remind me of things but I could not, when I was thinking about this, remember another mistake like that. So, for me, that is on the deficit side. If you look at the NAO s Report, I think the number is 9.3 billion brought in from the high-risk corporate programme, billions brought in from other cases, and billions brought in from other initiatives. That was what my profit Q131 Ian Swales: My question is, how are you measuring those billions? Remember we are talking about tax assessments. What are you actually measuring? When you say you brought in 1 billion, what is it measured against? I cannot imagine they are volunteering 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 the Exchequer that we have recovered. As the Committee has considered before, a lot of our work involves tax avoidance. Perhaps I could go back to something that was said on my left, but I cannot remember by whom. It is only in the past three or four years that we have been 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 are winning arguments, largely, with large corporates and their advisers. Simon Bowles: To put that into context, Mr Swales, we achieved a compliance yield of 13.9 billion last year, which is double what we achieved five years ago, in the context of Chair: But we do not know what you lost. We do not know what we could have got. Q132 Ian Swales: May I then ask, because it is relevant to what we have been talking about, what the fact that you have recovered these billions whatever they are says about the records inside the Inland Revenue, in terms of assessments and so on? At the back of all this, what the Committee, and by inference taxpayers and Parliament, are concerned about is the idea that people within your organisation and perhaps you personally have the power to negotiate on billions, without having too much governance or accountability record keeping. That is the elephant in the room that we are exploring. My question is: once you have got to the point that you have recovered billions, is that all reflected in the detailed records in the Inland Revenue? How does it all work? Dave Hartnett: We keep very detailed records, indeed. We want them for more than one reason. We want them for governance. We want them for precedent value. We also want them to record what techniques worked and what arguments worked. Q133 Ian Swales: So, if we go to the records of an organisation like the one we have been talking a lot about and we open up the files, we will know how that organisation was assessed and what the final settlement was. Dave Hartnett: Absolutely. Q134 Chair: Mr Hartnett, you are saying yes to that, but that s a nonsense, because you would not tell us the 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 Swales asked a different question. Q135 Chair: No, he didn t. He said, If we went to the file of company X, could we look at the way you dealt with them? And the answer is no, because you would 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 your organisation and see that this company, whichever it was, was assessed for 1 billion in tax, that you did a deal and they paid 0.5 billion, and that there was a simple 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 a record which said, We wrote off 0.5 billion. Can I just say, Mr Swales, that the National Audit Office has complete access to our records? We hide nothing from it at all. Q137 Stella Creasy: Mr Hartnett, I am a little confused, and I wonder if you could talk me through this. You talked about using a bespoke process. Who designed it? Dave Hartnett: It is truly bespoke. It works for each of those four cases. Q138 Stella Creasy: Who designed that bespoke process? Dave Hartnett: The process evolved as we tackled the cases.

36 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 12 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury Q139 Stella Creasy: Who designed it, because if it is bespoke it was created at that point? Dave Hartnett: Well, the design of a bespoke process happened within our business tax area and it will have been designed by senior officials there. Q140 Stella Creasy: So by senior officials, but it was not anything to do with the high risk corporate programme? Dave Hartnett: Yes, because, as I said earlier, members of the high risk corporate programme board are those senior officials. Q141 Stella Creasy: Such as yourself. Dave Hartnett: No, I am not a member of the high risk corporate programme board, and I have not designed any of those processes. Q142 Stella Creasy: So you were made to apply a bespoke process that you did not design yourself, but that you ultimately judged. Dave Hartnett: Ultimately judged, yes. Q143 Stella Creasy: Would you use that again? Dave Hartnett: No. We are changing the process. We learned from what the NAO had to say, and we are making a significant change. We will put everything through the high risk corporate programme board and we are changing the way we have started already in which commissioners operate cases. We believe that there will always be a small number of cases, and there have been only a small number of such cases in the past, where a commissioner will be heavily involved in negotiations. Where that happens in future, two other commissioners will review the process to ensure that the process was appropriate. Q144 Stella Creasy: So in this instance what you have learned is that more than two commissioners should have been involved, and that the bespoke model that the board put together was not the right model to use. Dave Hartnett: I want to change that just slightly, if I may. What we have learned is there will be greater assurance if two commissioners unconnected with negotiations review the process. Q145 Stella Creasy: How are you going to achieve that? You said earlier that it was quite difficult, given the nature of these cases, to get that level of separation. Dave Hartnett: We have four commissioners at the moment. As head of tax, I am most likely to be a commissioner involved in negotiations in a small number of cases and, in future, any case like that will be reviewed by two other commissioners who will be able 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 the difficulties you faced in having the separation that your own government structure said was required was that other commissioners were involved in resolving cases in the same way that you had been. Now you are saying that that is possible. I don t quite understand. Dave Hartnett: Where we are going to draw the line and we are going to draw it very conservatively is that it will be acceptable for a commissioner to advise on an issue and, depending on the degree of advice, perhaps to review the process. But commissioners who have done more than that or have been involved in negotiations will not be part of the 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 can advise to some extent, but they can t negotiate. Is that what you are saying? Dave Hartnett: Let me try again. I am very sorry for not being clear. Where a commissioner has been involved in the process of negotiation of a case, that negotiation and any proposed settlement will have to be reviewed by two independent commissioners who have had no role in the case before it can be formally settled. Q149 Stella Creasy: So if you are saying that that is a better process Dave Hartnett: Yes. Q150 Stella Creasy: You accept that the mistake in this case was that somebody was involved in both the negotiation and the review of the settlement, and that calls into question the process that was undertaken. Dave Hartnett: But there were two other people involved in the review of the settlement who hadn t been involved. Q151 Stella Creasy: But you have just said that actually Dave Hartnett: No, we are changing in the way I have described. Q152 Stella Creasy: So you would accept that there was a problem with the way in which this decision was made. Dave Hartnett: I think there has been a lack of objective assurance, which the NAO brought out. We have accepted its recommendations. Q153 Mr Bacon: I just want to clarify with the NAO. Mr Hartnett, earlier you characterised this report as being quite good in its conclusions, but my reading of it is basically that it says, Are the processes adequate? Well, no they are not. And, to the extent that the processes were as they stood however inadequate that might have been were they complied with? Well, no they weren t. Is that a fair summary, would you say? Paul Keane: I think it is fair to say that we conclude that the processes were adequate, but we note the four large cases that have been discussed where effectively, HMRC set aside those governance arrangements, and that s where we raised concerns around the adequacy of the process. Q154 Stella Creasy: There is something that confuses me. If you are saying that you need to use a

37 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC and HM Treasury different system and you did not design that original bespoke system, what did you say when they came to you and asked you to take part in the resolution of this case? Did you not raise concerns yourself that you were being put in a difficult position? Dave Hartnett: Can I just explain the process by which we raise the level of assurance on cases? The high risk corporate programme board will agree to settle cases where more than 100 million is involved under consideration, that is, because it might 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 cannot agree. We have had one instance of that. It goes to commissioners because we require 100% complete consensus agreement on the part of the high risk corporate programme. Q155 Stella Creasy: Mr Hartnett, this is interesting, but the question I actually asked you is about a slightly different issue. If you didn t design this bespoke system and you have now outlined to me some of the challenges that you have learnt from the NAO why did you participate in it? You were saying that actually, you want in future to work in a different way. Did you raise any concerns that you might be in a difficult position that you might find yourself saying, as we are saying, Well, how you can negotiate and agree?? Dave Hartnett: I have had concerns at various times that if I can put it this way I am the only commissioner in HMRC who has deep tax knowledge, so I was always going to be involved. I think that the NAO has shown there is a very clear way to do this better. Q156 Stella Creasy: Did you try to excuse yourself from this? Did you try to put that separation in because of your concerns? Dave Hartnett: No. Q157 Stephen Barclay: Did you just say you are the only commissioner with tax knowledge? Dave Hartnett: Deep tax knowledge. And there are six tax commissioners altogether. Q158 Stephen Barclay: So for being a commissioner of HMRC, having tax knowledge is not part of the job spec. Dave Hartnett: Well, we have many requirements of our commissioners. They are very talented people. Q159 Chair: Well, how on earth are they going to judge, if you do all the negotiation? You are now going to exclude yourself in the future from signing off those negotiations, but the people who are going to have responsibility have no understanding of tax. I would not want to sign them off. Lesley Strathie has no knowledge or qualifications on tax. If she will be signing off your work, that is not sufficient; that is not a check. Dave Hartnett: No. Alongside what we decided to do on the back of the NAO Report, we will be appointing more commissioners subject to the sovereign agreeing 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 have advice; they will be able to check whether advice was taken; they could get advice from inside or outside the Department so their position is a little like that of Ministers, who must make decisions. Q160 Chair: No, because what you were very careful in saying in your evidence to us was that all they are looking at is process. To take the Vodafone instance, where we know Vodafone had 2.2 billion, or thereabouts, in its accounts, set aside to settle tax disputes, you ended up getting something like 1.4 billion out of them I cannot remember much less than they had even made provision for. I am interested, as the Chair of the value-for-money Committee, in whether that loss of nearly 1 billion even from what Vodafone had in its account, set aside to pay tax, was value for money. I need tax knowledge to be able to assess whether the deal that you finally did was a good deal. It is crazy to think that someone like Lesley Strathie and I have huge regard for her as a manger can make that judgment. Dave Hartnett: Let me say that there is frequently a difference between what companies provide some provide very low; some do not provide at all and what the tax issue is resolved for. Simon Bowles: Can I just come in there? I was a public company finance director in a previous life, and it is my experience that companies will want to provide conservatively often very conservatively for their tax liabilities, because what you do not want to do is go to the market twice: once with a surprise about a tax liability, and then, Actually we had to up it. Q161 Stephen Barclay: What was HMRC s assessment? I do not mean of any individual case we have already covered that; but what was the combined value of the four cases where governance was not correctly followed? Dave Hartnett: Oh dear, I am having to disappoint you again, Mr Barclay. Billions, but given that a number of the companies involved, and other companies, released public details of provision and the tax they pay, if I give you a more precise figure Chair: We do not even know which companies are involved. We know Vodafone, because Private Eye gets it out. We know Goldman Sachs, because The Guardian or someone gets it out. We do not know the other two. Q162 Stephen Barclay: On all four of those cases, was written advice sought by any commissioner signing off the deal, prior to that acceptance being communicated to the company? Dave Hartnett: I am trying to remember. Certainly on three of them there was extensive advice. Q163 Stephen Barclay: I do not want to talk about Vodafone. We cannot talk about specifics. My question was this. There were four cases where the NAO says governance was not followed. In an early answer, Mr Hartnett, you referred to one of the controls that we should take comfort from being the

38 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 14 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury fact that the NAO has unfettered access. I assume that, in exercising that unfettered access, it would want to see the written legal advice in order to assess whether the legal case was strong and you were one of the people signing off deals, as a commissioner. To come back to my question, if I may: was written legal advice sought, in all four of those cases, prior to any acceptance being communicated to the companies? Dave Hartnett: I can assure you it was in three. I can t remember 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 in the negotiations also review the decision? For the one where legal advice was not sought and the one where you are unsure whether legal advice was sought, can you clarify whether it is also the case that the person participating in the negotiations also reviewed the settlement? Dave Hartnett: There are three cases. The NAO will help if I get this wrong. For three of the four cases, at least one commissioner was involved in negotiations and in approving the settlement. Paul Keane: One at least, and in one case both commissioners. Q166 Mr Bacon: I am staggered at so many tax commissioners not having deep tax knowledge. I am delighted that you are hoping to appoint more. Can you remind us who the other two tax commissioners are, apart from you and Dame Lesley? Dave Hartnett: They are Steve Lamey, who is the director-general in benefits and credits, and Mike Eland, who leads our enforcement and compliance. Q167 Mr Bacon: So we are talking about full-time employees of HMRC. The analogy of a non-executive director of a public company would not apply. These are full-time people, one of whose jobs is to be judge, jury, executioner and gravedigger on deals. You are rightly concerned that you are the only one with deep tax knowledge, which I find extraordinary. Only in this country could that happen. How many more are you seeking, with the sovereign s consent, to appoint? Dave Hartnett: Two. Q168 Mr Bacon: And they will both have deep tax knowledge? Dave Hartnett: One will have deep tax knowledge. Q169 Mr Bacon: Will it be a future requirement that eventually they should all have deep tax knowledge? Dave Hartnett: Our non-executive chairman has made it clear that his aspiration for our executive committee I do not think he has expressed this in terms of commissioners is that half would have deep tax knowledge. It is not like that yet. Q170 Mr Bacon: Half would be marvellous. There are a number of issues I want to pursue, but Mr Barclay raised the issue of the NAO having full access and being able to decide whether the case was strong enough. The fact is that you have resisted the NAO s demand for detailed legal advice. I have been looking at an internal from HMRC, which you were copied in on. It discusses the cases with over 100 million tax at risk, which we are intending to disclose to the NAO. It states: You will remember that NAO were pushing very hard for detailed information on the cases where we make a provision or contingent liability in the trust statement. Dave and Alan I don t think it is the comedian from the 1970s; I believe it is you and Alan Evans were able to convince them to accept less detailed information that did not give any indication as to whether we thought our case was strong or weak. In those circumstances, it makes it very difficult for the auditors to do their job 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. It is the provision for disputed tax that appears in our accounts. 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 in relation to the provision in our accounts. I think I have that right. Q171 Mr Bacon: Given that the NAO has full access and will not disclose it further, so it should have oversight, the confidentiality issue in this relationship is not an issue. The issue is whether the case is strong or weak. The point is that the NAO and, indeed, we, cannot make an assessment as to whether you have been administering the affairs of your organisation effectively, efficiently and economically if we cannot understand whether you were following your own litigation and settlement strategy by going for 100% in strong cases, because you have resisted telling them whether the cases were strong or weak. Dave Hartnett: The issue there was not resisting at an absolute level; it was what was going to be disclosed by the NAO. The Comptroller and Auditor General may want to say something about this. John Thorpe: Could I say something about it? I think that this relates to the audit of the financial statement. This is how the process worked. We identified approaching 100 legal cases which we thought may have a bearing on the financial statements. We carried out a review of those and did some in-depth testing on some of those cases. The issue is that the schedules that sit in the finance department are anonymised, because they cannot be passed around the organisation with taxpayers details on them. To get the assurance that we needed first, to say what the strength of the case was we had to go to the legal department, and to tax experts. We also spoke with analysts about how they quantified whether it was a liability or an asset. In a spectrum of cases, some have a liability for the department, and from memory that approaches 6 billion 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, and cases where the department has a potential claim to recover tax. We cannot make an assessment of how that should be recognised without looking at the

39 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC and HM Treasury individual papers or talking to the individual experts to assess the strength of the case. Q172 Mr Bacon: But that is precisely what they say they are not given: Dave and Alan were able to convince them the NAO to accept less detailed information that did not give any indication as to whether we thought our case was strong or weak. The list is set out as follows: alphabetical order; no split between cases where there is provision for a contingent liability; and a very brief description of the case. John Thorpe: We have very detailed working papers with all those cases, and with the supporting documentation, which supports where they fall in provision or contingent liabilities. Q173 Mr Bacon: I understand that this is under your financial audit hat, but presumably there would be nothing to stop the NAO going back in with a valuefor-money hat on and doing a value-for-money study, looking at the whole issue of strong and weak cases if you wished to do that. John Thorpe: Indeed. If I can talk from the financial audit perspective, I should also say that we track those cases. They ve been on the books for many years, so we are reviewing them on an ongoing basis. It is not simply an end-of-audit activity. Q174 Mr Bacon: I am relieved to hear it. Thank you very much. May I quickly move on? Mr Hartnett, you mentioned in answer to Mr Wharton earlier that at the meeting with Goldman Sachs three HMRC officials were present, and what you described as three Goldman officials. Did you mean employees of Goldman rather than advisers to Goldman? Dave Hartnett: Yes. Q175 Mr Bacon: So you were not that oblique in saying that basically, David Goldberg QC wasn t there, because he s not an employee of Goldman? Dave Hartnett: I keep being asked the same question whether Mr Goldberg is at our meetings. Q176 Mr Bacon: Well, it seems that many of us want to 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 had lunch with Mr Goldberg? Dave Hartnett: Yes. I had lunch with Mr Goldberg perhaps once, twice or three times in the last five years. 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 leading tax silk? Dave Hartnett: Yes. It took a long time, but we managed to persuade him to work for us. Q180 Mr Bacon: At least he has deep tax knowledge. Dave Hartnett: Not all tax silks work for us. Q181 Mr Bacon: I have a marvellous schedule of your lunches, and if I had had as many lunches I d be even fatter than I am. I accept that it is sensible for someone in your position to meet people socially, whether for dinner or breakfast. We all have such encounters and they are very useful, so I m not attacking you for that although there are quite a lot of them but I have a couple of questions. Dave Hartnett: May I just say something first? Many of those are not simply lunches. I speak extensively on tax. Q182 Mr Bacon: So you were guest speaker. Dave Hartnett: Quite often. Q183 Mr Bacon: On the right-hand side, it sometimes says, Speaking engagement. Am I to take it that when it doesn t say so you were still a guest speaker? Dave Hartnett: Absolutely. Q184 Mr Bacon: Where it says individual, what are we to make of that, and why can t the individual be named? Dave Hartnett: Because the convention that we have been given across Whitehall is that we don t name individuals if they re taxpayers, and the individual might be a taxpayer. Q185 Mr Bacon: Most people are taxpayers or are you having lots of lunches with non-doms? Dave Hartnett: Not really, Mr Bacon. Q186 Mr Bacon: Everybody s a taxpayer. Even the Queen is a taxpayer. Dave Hartnett: What we re trying to do by that is to ensure that it is not simply put into the public domain what individual we might be talking to about tax issues. 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 and look at a list every day. Dave Hartnett: We have a look at the tax Q188 Mr Bacon: Is there any serious reason why we couldn t be more open about that? It would give extra confidence, and confidence in the tax system would be a good thing. Dave Hartnett: Let me put it like this: imagine that you appeared on my list named. Q189 Mr Bacon: I would be delighted to come to lunch, by the way, should you wish to invite me. I d put it on my website. Dave Hartnett: There are probably only two reasons why the public at large would deduce you were there: first, that you had a constituency issue, but we do not tend to have meetings like that; and secondly, that you had a problem. The convention is that you should not be indentified.

40 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 16 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury Q190 Chair: I have to say, I do not take as generous a view of this as Mr Bacon does. In your position as the chief negotiator on tax disputes, it is very dangerous for you to go and have lunches 107, we are told, in two years with a range of organisations with which you have been negotiating. Had I, as a Minister, done that with organisations I was doing business with, I would have been on the front of the Daily Mail and pushed out of my job. That is the reality of it. Dave Hartnett: Chair, that list does not involve companies that I am negotiating with. Q191 Chair: It does. Well, we don t know because some of them say taxpayer confidential. The list involves a load of organisations that will be acting as the advisers to individuals with whom you will be negotiating PricewaterhouseCoopers happens to be the old firm that I worked for, so I know that it would have done it for them. Dave Hartnett: As I understand it, there are competition rules about how and when leading figures in the big four accounting firms can get together. Once or twice we have had real trouble getting them together when we wanted to talk to them. The heads of tax of the major accounting firms have supper quarterly, I think, and once or twice a year they have invited me to go. Q192 Chair: You have had 107 lunches corporate hospitality engagements in two years, which is at least one a week. Dave Hartnett: They are not all lunches, with respect. Q193 Chair: Dinner, lunch I can go through the list. Dave Hartnett: I am scrupulous about recording everything. Chair: I think it is deeply unwise. Q194 Stella Creasy: Mr Hartnett, can we stay with your point? You said that you might not have lunch with Mr Bacon, because people might draw inference from that. What inference do you think they would draw from your having lunch with companies like Goldman Sachs? Dave Hartnett: They might infer that a tax issue is under consideration. Since we have started publishing fully, I do not do that I find other ways of doing things. Q195 Stella Creasy: What other ways? Dave Hartnett: Well, maybe a cup of coffee in my office. Q196 Stella Creasy: So you do not record every contact you have with these companies. Dave Hartnett: We are not required to record a cup of coffee. Permanent secretaries are now required to record and publish all meetings we have with people outside the civil service. If you look at my published list, it says a taxpayer ; it does not say who the taxpayer is. Q197 Stella Creasy: Given that, potentially, four firms are involved, and you do not have to name any of 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 the pub with the four firms involved in these disputes? Dave Hartnett: Sorry, I am now confused. Q199 Stella Creasy: In that same time period, can you clarify that the only social contact you had with the firms that the Department was in dispute with that you were negotiating on was the ones that are listed? Or were there other times when you were in contact with them? Dave Hartnett: There is nothing other than coffee Q200 Stella Creasy: So you confirm that, on top of those contacts, you had other contacts with the four firms in question. Dave Hartnett: Yes, they might have come in for a meeting on an issue. Q201 Ian Swales: I understand why you might not want to have this information in the public domain, and you have given us reasons for that. But we are also talking about internal governance in HMRC. Is the knowledge of whom you have seen available anywhere in HMRC? Dave Hartnett: Yes. My line manager has it and lots of other people in HMRC will know about it. Q202 Ian Swales: So the top people in HMRC know about 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 right way to describe it Sir Gus O Donnell. Q206 Stella Creasy: So have you been in contact with Gus O Donnell to report all the coffees as well as 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 list as well. Q209 Stella Creasy: So he doesn t get the cumulative total. Dave Hartnett: Miss Creasy, when I have coffee with an accountant or an adviser, it is almost always to address a particular issue, usually accompanied by

41 cobber Pack: U PL: COE1 [O] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC and HM Treasury someone else from my department, and sometimes if you can forgive me for putting it this way they bring a great gang with them from their firm. Q210 Ian Swales: Can I ask one last question? Do you think it would be wise if you always had somebody else with you from HMRC at such meetings? Dave Hartnett: That often happens, and yes, it could be wise. Q211 Ian Swales: Well, you have said it often happens. I am asking, do you think it should always happen? Dave Hartnett: Not necessarily, but perhaps on the back of this discussion I will think again. Q212 Stephen Barclay: It is reasonable to have coffees and to meet people. You have to be accessible and you have to be able to work. It comes back to the point that we touched on earlier about what the written legal advice is and whether the NAO has access to it. Can I take us to a slightly different area? Once you reach settlement with a firm, what is the maximum period over which they must settle the outstanding claim? Dave Hartnett: That depends entirely on what the issues are and the financial position of the organisation. Some 1 billion-plus settlements have not been fully provided for, and there are significant issues. Q213 Stephen Barclay: So it s unlimited? It is at your discretion? Dave Hartnett: No, we are always trying to strike the right balance between getting the money as fast as we can and collecting for the Exchequer the maximum amount of money that fits with Q214 Stephen Barclay: I don t want you to talk about well, I would like you to talk about individual cases, but you have given your position on that and you are going to write to me with a legal note on that earlier discussion. Can you tell us the maximum period that a firm has been allowed before settling its outstanding agreed tax bill with you? Dave Hartnett: The longest I can remember this goes back a little way was probably 10 years. Q215 Stephen Barclay: My constituents, especially small firms, would find it very odd that at your discretion you are giving firms 10 years to settle their tax bill. Dave Hartnett: Well, I don t know about your particular constituents, but I can certainly say that we have given small firms and individuals longer than that at times. Q216 Stephen Barclay: Okay. Where you give a firm more than 12 months to settle its outstanding bill, do you look at its balance sheet to see what assets it has got? Dave Hartnett: We do more that that. It is in the nature of our enquiry to look at the balance sheet. I would expect our people to be thoroughly familiar with the balance sheet. Our business payment support service, for example, which is the way we support smaller businesses by giving them time to pay, will ask for financial reports as well before we agree the time. Where we are settling with a business over time, we will often ask for a bank report or some other financial report. Q217 Stephen Barclay: How are the governance criteria around that documented within the department? Dave Hartnett: We have clear guidance for our people on things like the business payment support service, and we have advice on the time to pay for investigation settlements in our manuals. Q218 Stephen Barclay: And that is something that the NAO would look at? Dave Hartnett: I don t know whether it has looked at it, but it is very welcome. Q219 Stephen Barclay: To take a hypothetical case, it would not be possible, for example, for firm X with a bill of 1 billion to have 5 billion or 7 billion in assets? Dave Hartnett: Yes, I think it would be. It depends on what is on the other side of the balance sheet. We want our money we want the nation s money as fast as we can get it. Normal terms are 30 days; sometimes that will stretch to months. If we cannot get it faster, we will take it over a longer period. Q220 Joseph Johnson: On Stephen s point about a level playing field between smaller businesses and the like of Goldman Sachs, I have businesses in Orpington that are being put out of business for late payment of their VAT returns, and they are not even being allowed to stagger them over a quarter, let alone a period of years, so I really don t buy the argument that there is a level playing field. That is not the point that I want to go back to, which is that we are in a period of incredible fiscal consolidation in Britain. You have got a huge job to do 25.5 billion of potential tax out there to be clawed in. I am concerned that HMRC s credibility has taken something of a knock in the past 18 months as a result of the decision not quite sure whose decision, at this point to go outside usual procedures with these bespoke arrangements in respect of Goldman Sachs, Vodafone and a couple of other important cases. Do you acknowledge that that HMRC s credibility in the public and between the corporates has taken a knock? Dave Hartnett: I think the speculation, if I may call it that, about what we have done as a department in one or two large cases has been damaging to HMRC but, actually, much of the speculation has been plain wrong. At the TSC hearing before last, for example, on advice I aimed to take away in respect of one corporate some of the mischief that was out there about how we had operated. Q221 Chair: May I ask you another question? You did the deal in Switzerland for UK residents with

42 cobber Pack: U PL: COE1 [E] Processed: [ :25] Job: Unit: PG01 Source: /MILES/PKU/INPUT/016824/016824_o001_015792_o001_th_Corrected 12 October 11.xml Ev 18 Committee of Public Accounts: Evidence 12 October 2011 HMRC and HM Treasury funds in Swiss bank accounts I understand that you negotiated that, didn t you? Dave Hartnett: I negotiated, but it is a ministerial agreement. 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 difference in treatment of rich people who have Swiss bank accounts and the single parent who is being pursued for an overpayment of tax credit? Dave Hartnett: I think, Chair, what we have achieved in relation to Switzerland was that Q224 Chair: How do you justify the difference in treatment? Dave Hartnett: I am sorry, I need to explain a little about Switzerland first. I will be very quick. What we have achieved will be money for the Exchequer that we would not have got in any other way. We have protected the Exchequer in relation to cases that are already working so they cannot come within the arrangement and we have protected the Exchequer in relation to serious organised crime and the like. My answer to you would be that this Switzerland deal is gaining for the Exchequer billions of pounds that it would not otherwise have got. We are addressing issues in the UK for large and small individuals Q225 Chair: How do you justify the difference in treatment for rich people? And I am not sure that you have protected, because they can all take their money offshore to another country before May How do you justify the difference in the treatment of UK taxpayers who are rich enough to have bank accounts in Switzerland, and the way your department treats the overpayment of tax credit to single parents if you pursue it at all? Dave Hartnett: We know the people who have been overpaid tax credits and can address that, but we do not know the identity of people in Switzerland and we cannot establish who they are. Q226 Chair: So your justification of the difference in treatment is Dave Hartnett: A pragmatic solution to a longstanding difficulty. Q227 Chair: Although they can all go offshore somewhere else by Dave Hartnett: But we have made arrangements to follow the money, which has been very important to us. And we will follow the money. With Lichtenstein and with Switzerland, we are bringing in huge amounts of money for the Exchequer. Q228 Chair: We haven t covered everything that we wanted to this afternoon, but I think in the interests of everyone if you are happy with this we shall draw the sitting to a close. I just want to say a general thing and ask you a final general question. What comes out of this for me and the members of the Committee is that there is a huge sum of money 25.5 billion, which is an enormous amount of money in potential income to the taxpayer, and incredibly important at a time of deficit reduction and you are responsible for trying to collect it. You are also a member of the board that oversees your action. You are also a commissioner who oversees the action of the board on an action you have taken. The NAO does not do the detailed work to assess whether the deals you reach are value for money and, at present, there is no way in which you account to the public or to MPs to us as custodians of the taxpayer s pound and nor do you account for whether you are doing a job that is providing value for money. That is how it feels to me. My final question: do you feel that? If you do, what would you change so that we, as the custodians of the taxpayer s pound, can feel better about ensuring that you and your team provide value for money? Dave Hartnett: If I may, I ll say two things. First, I am very confident that we are providing value for money, but I think that both the TSC hearings and interim report, and this hearing, make it clear that there are real concerns here. The TSC has flagged up to us that it wants to consider, as part of its current review of my department, how greater clarity can be brought Q229 Chair: What is your view? You are currently the permanent secretary there. What is your own view? I have to tell you that everyone came to this with a fantastic unanimity of view around the table across party and no one prepared, in that sense, for it. We came with a unanimity of view and the Treasury Committee has a similar view. You have been around for a long time. How can we get a system? You tell us you are value for money, but the only bits that hit the press question that. Your behaviour in relation to things like lunches makes us even more suspicious, and there is no way of verifying things on behalf of the taxpayer. Dave Hartnett: I think the answer to your question is going to have to be determined by others to whom we provide advice. The TSC asked whether we had seen systems elsewhere. There is one in Finland, for example, where there is an independent body between the tax administration and the taxpayer when it comes to resolving issues. Most other countries have a system like the United Kingdom s. I did look before I came here at the policy statements made in the United States, for example, which mirror our own mission statements and the like. But we will provide advice to others, because it will be their decision as to whether the system changes. Chair: Thank you very much. I ask my members to stay behind.

43 cobber Pack: U PL: COE1 [SO] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev 19 Monday 17 October 2011 Members present: Margaret Hodge (Chair) Mr Richard Bacon Stephen Barclay Stella Creasy Matthew Hancock Mrs Anne McGuire Nick Smith Ian Swales James Wharton Amyas Morse, Comptroller and Auditor General, John Thorpe, Director, National Audit Office, Jane Wheeler, Director, National Audit Office and 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, Dave Hartnett CB, Permanent Secretary for Tax, HM Revenue and Customs, and John Keelty, Director, Finance Planning and Performance, HM Revenue and Customs, gave evidence. Q230 Chair: Welcome again, everybody. We have a lot to get through because we want to focus on the parts of the Report that we weren t able to cover last week and we want to deal with the other Report from the NAO, on cost reduction in HMRC. It is appropriate to say in the public arena that we aren t going to let matters rest from last week. The Cabinet Secretary has asked to see me and I intend to attend that meeting with Richard Bacon from the Conservatives and, I hope, Ian Swales from the Lib Dems. From there, we will decide what further action we re going to take. We would like Amyas to do some further work, and perhaps, Amyas, you ll describe that further work. There are one or two questions and then we ll move to that. In the first instance, would you like to describe the work? Amyas Morse: The proposal is that we would put ourselves in a position to examine the reasonableness of some of the larger settlements, probably with the benefit of some tax advice, and we would aim to report on that in a confidential private session at some point in future. I know HMRC and Gus O Donnell would co-operate, but it would be helpful to have that confidential session. That might help to satisfy a lot of the issues that are still there. Dave Hartnett: Chair, if I may, you asked me a question on Wednesday, which I was not able to answer because Mr Mitchell asked a question at the same time, and I fear I turned to his question rather than yours. The question was whether we would talk to you in confidence. Had I answered, I would have talked of the sort of confidential discussion just described by Amyas Morse. We are ready for that sort of discussion. Chair: Good. Dave Hartnett: And we will support the NAO in its work. Chair: Thank you very much. There are just few questions arising out of the transcript from last week that Stephen, and perhaps Richard, would like to put to you. Then we will move on to discussions of PAYE and other matters. Q231 Stephen Barclay: Starting with the legal advice, which you offered to send. We have not received that ahead of today s hearing. Could you clarify when that will be received? Dave Hartnett: The difficulty, Mr Barclay, is that the legal advice is subject to legal, professional privilege. The Government do not disclose their legal advice publicly, save in very rare circumstances. We have said that we would write setting out the legal position. We have been asked to advance the time by which we do that to Wednesday lunch time, and we will meet that timetable. Q232 Stephen Barclay: Can you advise the Committee on which areas you sought legal advice? Dave Hartnett: I m thinking of the legal advice all the way back to We were going to cover the whole piece for you. Basically, it is legal advice on taxpayer confidentiality. Q233 Stephen Barclay: Coming on to one of the issues we were trying to get at around the point that you are arguing on individual taxpayer confidentiality, Vodafone, in its own regulatory announcement on 23 July 2010, said that the settlement comprising the 800 million in the current financial year would be paid over five years. In your evidence to us last week, you said that time to pay would be granted only if a company 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 where I was last week. I cannot talk about Vodafone, but I am sure we should be able to pick up something like that in confidence in the context Mr Morse and the Chair have described.

44 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 20 Committee of Public Accounts: Evidence 17 October 2011 HMRC Q234 Stephen Barclay: This is an area that the company itself has put in the public domain. It made a statement saying it had five years. You have guidelines also in the public domain that say time to pay cannot be granted, except if the company does not have the assets. Vodafone s financial position is in the public domain. I can happily quote its position on its operating profit increasing from 11.8 billion to 12.2 billion, the dividends it was paying and other points regarding its financial strengths. That is all in the public domain. It seems there is a clear breach of your own guidelines, yet that is information Vodafone has shared with its investors. Dave Hartnett: I am sorry but, even where information has been put in the public domain, I cannot discuss a taxpayer s position. We will try to do so in the in confidence discussions. Q235 Stephen Barclay: Is it just a coincidence that the settlement with Vodafone was reached the day before the quarterly announcement by Vodafone? Dave Hartnett: I have no idea. I am sorry. Q236 Stephen Barclay: So, the fact that that settlement was reached with Vodafone, without written legal advice, the day before the company announced its dividend position and its quarterly returns that is just a coincidence, is it? Dave Hartnett: I cannot comment on that. Q237 Mr Bacon: Mr Hartnett, I want to ask you about the mistake that you referred to last week. That was what you described as an issue in relation to which a mistake was made, because we saw an impediment to dealing with an issue. In fact, the impediment had been removed. A number of us at the meeting did not know that. You went on to say, It was actually me who took the mistake to Mr Inglese. When did you first know that there had been a mistake? Dave Hartnett: Probably four or five days after the meeting. Q238 Mr Bacon: Just to remind us, what was the date of the settlement meeting? Dave Hartnett: I think 19 November. Q239 Mr Bacon: So you were abroad when you found out about the mistake? Dave Hartnett: There was I need to check. I may need to correct when I went abroad. I may have gone abroad 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 following Monday, the 29th, you were in India, and you did not get back until 5 December. In fact, you said to us last week 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 a mistake? Dave Hartnett: I believe I will have to check immediately following the weekend after the settlement meeting, when I was talking to my colleagues. I think I explained to the Treasury Committee that there were actually two mistakes. There was one financial error, and there was a mistake made in not reporting the case instantly to our highrisk 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: I am not trying to be glib I know it sounded glib; I am often accused of that, I m afraid but that sounded to me like what you just said. A deal was struck but it was not reported immediately. What does that mean, if not 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 the authority of the sector lead and the case relationship manager to reach. Over the weekend following the settlement, the sector lead began to realise that it was not within his competence to do that. That was the other mistake, and it was referred late to the high-risk corporate programme. 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 in the issues. Q247 Mr Bacon: That sounds familiar, actually not consulting people who are familiar with the issues. So that was the second mistake: the deal was not reported immediately. The first mistake was what 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 charge interest, 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 charge interest it is standard practice to charge interest

45 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC 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 last week. 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 the hands of 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 confident about 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 so confident about the nature of that impediment? Dave Hartnett: Well, because I had not been running the case, but those with me had, and between us 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 interest would run that the interest would continue to roll up and be due if it did not settle with the other 21 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. Q257 Stephen Barclay: At our previous hearing you said that you could not recollect whether a detailed note was taken at the meeting. Have you now had an opportunity to check? Dave Hartnett: I have not yet had a chance to check, Mr Barclay. Q258 Stephen Barclay: You have not had a chance to 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 last week, you said, We keep very detailed records, indeed. It s surprising that you felt it necessary to phone the global head of tax at Goldman Sachs to summon him from New York and a meeting record was not kept. Dave Hartnett: Mr Barclay, I know there is a meeting record, which HMRC has, that was prepared by the taxpayer. I do not know whether there is an HMRC record as well. Q261 Stephen Barclay: But these were senior people at the meeting. When the mistake was identified on the Monday, was a note circulated to lawyers at that stage? Dave Hartnett: I spoke to Mr Inglese to seek his advice. I do not know whether he circulated a note; I certainly did not. Q262 Mr Bacon: When did you speak to Mr Inglese? Dave Hartnett: I think on the Monday, but I need to check, Mr Bacon. I m sorry. Q263 Mr Bacon: You think it was the 22nd, after the Friday. Dave Hartnett: Very soon after, yes. Q264 Mr Bacon: On the interest and the nature of the mistake, you prefaced your remarks about the interest by saying that you were involved in the 2005 deal. But it was in October 2005 that HMRC had warned that the interest would continue to accrue. It defeats me how, in apparently being so confident that you could not charge interest and therefore it was not something that you seriously thought about doing, the record showed the exact opposite. You had warned them about the fact that you would continue to charge interest, and yet you, or the people you were with, did not revisit the question. If you had, you would have discovered that there was not an impediment. That is the whole point. Dave Hartnett: I think, Mr Bacon, that if the NAO is going to look at the matter, it should all come out then, because there is much more detail to come out. Q265 Stephen Barclay: You also said, in answer to one of the questions last week, normally we are able to intervene to correct them, as in mistakes, because they are spotted by the process. I spotted the mistake here. If the mistake was spotted as quickly as the Monday following the Friday meeting, why was it so binding on HMRC that you were not able to rectify it as would be normal practice? Dave Hartnett: I am not going to be able to answer that in public, Mr Barclay, but we will be able to deal with it through what Mr Morse is going to do. But let me just say this: there were discussions with the taxpayer shortly after we discovered the interest and the governance error. Q266 Stephen Barclay: But you accept that legally you were not bound by that decision. Legally you could have rectified it. Dave Hartnett: I received advice that we could regard ourselves as bound by it, or not bound by it. Q267 Stephen Barclay: In other words, you were not bound by it.

46 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 22 Committee of Public Accounts: Evidence 17 October 2011 HMRC Q268 Mr Bacon: Mr Barclay has put it as perfectly as one could. You have the option of either going back and revisiting it and saying, Yes, we will charge the interest or accepting that it was a done deal, and you went with the It s a done deal option, although you did not have to. That is correct, isn t it? Dave Hartnett: Mr Bacon, I have just been passed a note by my lawyers to tell me that this is taxpayer confidential and will need to be dealt with in the review of the case rather than now. Q269 Mr Bacon: I think we probably will not get much further today, and I look forward to the CAG s further report. It does seem very odd that not only did you choose the second option of accepting it as a done deal when you could have gone back and revisited it and fixed it, but Mr Inglese signed it off in that way, and so did two tax commissioners. That must have resulted in a negative impact on the revenue. The legal advice was that it need not have been that way. That seems very odd. Dave Hartnett: If I may, one final comment from me: must have may not be right. Mr Morse explained other possibilities last time, and there is more to this that will come out. Q270 Chair: Okay, we are going to come back to it after both the NAO work and our discussions with the Cabinet Secretary. We will probably expect him to give evidence to us anyway, although he was clearly unable to do so this afternoon. Right, PAYE. I do not know whether you are dealing with this, Mr Hartnett. One issue slightly concerns us. You have stepped up to be acting permanent secretary in the circumstances, which we completely appreciate. Are you able to do all this work of sorting out all the deals that you get involved in, and making sure that the 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. I am Lesley Strathie s second permanent secretary I led the Department for a year once before while trying to do other things. I am doing my very best. Q271 Chair: We might come back to that, because there are some concerns about your cost cutting. The PAYE story is a better one than when we looked at it six months ago and we welcome that it is a better place to be in. Looking at it in that context of a welcome improvement, let me briefly deal with the issues that remain. I am concerned that on page 9, in paragraph 26, we are told by the NAO that you have nearly 7 million individual records that are awaiting reconciliation, which is still 15%, which is one heck of a lot. When will you have done that reconciliation, and what is the impact of those figures on the financial loss to the taxpayer? Dave Hartnett: I ll ask Stephen to pick that up, if I may. Stephen Banyard: Under the old pay-as-you-earn system we had to manually reconcile 16 million or 17 million records a year; under the new one, we expect to have to reconcile 3 million to 4 million a year, so there is a huge reduction in the amount of manual work 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 have completed it this year on schedule. Q272 Chair: In this financial year? Stephen Banyard: Yes. Q273 Chair: Can you update the Committee on the total income tax forgone because of the delays and difficulties in introducing NPS? Have you got that figure or can you put it together for us? Dave Hartnett: I have got some numbers for you. For the years and , we have only a notional figure. The Committee may remember that when Lesley Strathie was here she explained that notional meant the largest amount, but that we would not have necessarily collected it all. It is important to realise that. That was a figure was 150 million. In , 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 notional figure. Lesley was at pains to explain that the actual amount that we might have collected in the summer of 2010 stood at 100 million, and by November 2010 it was down to 25 million. Q275 Chair: What do you in the NAO feel more comfortable with looking at? There is a heck of a difference between 500 million and 100 million. John Thorpe: Both the figures are included in paragraph 3.11 of the report. The 500 million was the notional amount at the time, in ; the 100 million 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 the database of open cases. The 100 million is the estimate of what could have been collected at the start of the recovery exercise in June Q277 Chair: So what could have been collected is different from what was owed. John Thorpe: Yes, because had HMRC acted at the time, 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 500 million, because that is not what could have been collected; the 100 million is what could have been collected. Chair: No yes. It is a question of what could and what should what was owing and what could have been collected there is a difference. Q279 Ian Swales: For example, that includes your changing 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.

47 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC Dave Hartnett: That should have been paid, but not every penny could have been collected. It would have been cost-inefficient to do so. Q281 Chair: I accept that. I understand that. Of course, in all these figures we do not have the Dave Hartnett: The 300 threshold we introduced for , and , involved the sum of 266 million. Q282 Chair: Right. I have another figure of 136 million of underpayments on the cases, not worked 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 41 million for recovery of tax forgone following successful taxpayer claims of remission under extrastatutory concessions. Dave Hartnett: That is correct. Q284 Chair: Then we have an unquantified amount, which you might like to quantify, of tax forgone from some 250,000 pensioners, where their tax codes failed to reflect their state pension between 2008 and 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 an extent unreliable, but the figure for the pensioners tax is so unreliable that neither we nor the NAO could put it into the report. Q286 Chair: Presumably, there will be another figure for these 6.7 million accounts that you have yet to reconcile, of which you have done 30-something per cent. Stephen Banyard: No, we expect to put all of those into charge, because they are in time. They are for and , and we are working them so that they will be in time. Q287 Chair: So, we are talking about, in total, 1.2 billion or thereabouts. Dave Hartnett: If the notional figure for is taken, it comes to that order. Chair: That is a shocking loss to the taxpayer. Q288 James Wharton: Do you think that, given where we are now and what we now know of how things have progressed, it was the right decision to increase the de minimis limit in order to streamline administration, but obviously taking on the cost of that? Dave Hartnett: I will bring in Stephen in a moment. We would have had real difficulty if we had not done that. It was a case of managing the work to make sure that we got the work done before the time limits ran out and that we caused less distress to taxpayers than we might otherwise have done. Stephen Banyard: What the Department faced, as it brought in the NPS system late, was a concertina of work. You cannot carry that bow wave forward for ever; you have to unwind it and start to operate the tax system in real time. By introducing the 300 tolerance, the Department cut out 40% of the adjustments, but only 8% of the yield. It was on that judgment that we took that decision. Q289 James Wharton: One of my concerns is related to discussions that I have had with HMRC employees who are my constituents about how they work. One of the issues that has repeatedly been raised with me is the lack of flexibility when data are input into systems. For example, when they enter things from people s tax returns, even if they know a figure is wrong, in many cases they have to enter that figure as it appears on the tax return in order that it can be picked up and corrected later. My concerns are twofold. First, can you explain if possible, I would be grateful if somebody could send me the guidance that HMRC employees use whether, if they have a figure that is wrong, they know within what bounds they are allowed to change it or to raise such a matter at the point of input? If there is some 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 of which added up disproportionately to the work that it would take to chase them up, the Revenue decided not to chase people beyond that de minimis limit. If what these constituents are telling me is true that errors are still being input as data go forward, with the idea being that they are picked up later is there a danger that this will happen again, perhaps on a smaller scale, because where the systems are not in place early enough in the data input process, we create errors that could have been resolved? Therefore, we may find ourselves making such a judgment again, saying, Well, we have all of these errors backed up, so we will increase the limit. It doesn t cost that much. However, we would be building in a system in which errors are commonplace I am sorry that that is a long question. Stephen Banyard: The general answer is that I am very mindful of the fact that data quality is extremely important, and therefore, with pay-as-you-earn and the RTI programme, we focused on getting data quality built in from the start. In relation to your point I know our staff are concerned about this matter selfassessment is a process now, check later regime. Just because the figures have been put in does not mean to say that we have shut our eyes to them. The people who do the checking then receive a list of exception cases, or cases where there is reason for concern, and we can then take a risk choice on which ones we decide to pursue. We have resource to pursue compliance, and we have to use it to best effect. Q290 James Wharton: The way that the process is working is at the heart of my concern. I am being told by people and you have acknowledged that staff are raising this with you internally that they are putting in data that they know are wrong, and people feel that they do not have sufficiently clear guidance or flexibility to correct that at the input stage. I understand what you are saying, which is that you put the data in and then check them. You have just said

48 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 24 Committee of Public Accounts: Evidence 17 October 2011 HMRC now, however, that those that stand out get checked, but how many are being missed? And, when you take the judgment on which are worth pursuing, with how many are you saying, We won t pursue that, but had the data been put in right in the first place, it would not 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 is actually being built into the system. Dave Hartnett: Mr Wharton, may I help? We recognise this issue. Our staff have raised it with us, certainly in the past. The extent of electronic filing now, particularly for self-assessment and by employers, and the electronic checks that happen there, throw things out much faster when they are evidently wrong. Those are put on to work lists and we address them. With nearly 80% of individual tax returns and a huge proportion of employer returns now filed electronically, we are detecting these things automatically. It does not excuse the past, however. Q291 James Wharton: Do you believe that your system, as it is at the moment accepting reasonable errors and problems that will be thrown up is working sufficiently well, and therefore, you will not be revisiting it, saying, We are either going to increase the de minimis limit, or We are not going to chase those and actually try to get that money in, because there are so many of them, or because there is such a backlog? Do you believe it works sufficiently well to avoid being in this position again via a different means? Dave Hartnett: We think there has been a sufficiently significant improvement for us to be able to reduce the de minimis back from 300 to 50. Certainly, on current performance levels, we do not expect to have that 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 of the guidance that staff are given on when they can amend at the data input step, that would be much appreciated. Dave Hartnett: Of course. Q293 Chair: I have two other areas that I want to pursue I am looking around to see if anyone else wants to. One is that on figure 9 on page 36, you have now calculated that you have 1.9 billion in overpayments by individuals, and 1.1 billion in underpayments by individuals. Am I reading that right? 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 get that money in? What proportion of it? Stephen Banyard: We are fairly confident. Q295 Chair: What 100%? Stephen Banyard: Yes. Within the normal collection parameters, of some people going missing, some dying, and some becoming insolvent within those sorts of limits. These are within time limits, and we would expect to collect them. The way that the payas-you-earn system works is that at the end of the year, most people 85% will have paid the right amount of tax. Some will not, for very good reasons. Usually, it is because the taxable benefit that they get in the year has changed. We make a correction at the end of the year and we collect the money normally in the following year. Q296 Chair: You do not normally have this size of correction, 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 million underpayments is that the sort of size we get every year? Stephen Banyard: That is cash too. 1.1 million underpayments, can I John Thorpe: These issues cover two years, of course, because the Department had to reconcile two years together Chair: And they have not completed the reconciliation there is another 15% to come. John Thorpe: Yes, so it captures two years. Q297 Chair: But so far? What is the size usually of the 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 new system but last year the overpayments were 5.6 million (customers). We have completed the overpayments Q299 Chair: This is ? Sorry, Stephen Banyard: For the number of overpayments is half what it was last year. It was 2.3 million (customers with) overpayments. As for the underpayments, we are about to start issuing. 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-like basis, compared with last year and with the 300 limit, there will be half as many. But, because we have lowered the limit from 300 to 50, there will be the same number. So there will be about 1.2 million Q300 Chair: Billion we are talking billions here. Stephen Banyard: 1.2 million adjustments, and the estimated size of the adjustment is about a half of what it was last year. Chair: Oh yes, I see what you mean. Anne. Q301 Mrs McGuire: May I move us on to some of the work that you are currently preparing for, which is the linkages between the child benefit and the new systems, and indeed the universal credit? I think I saw a headline recently but I never believe everything I read in the newspapers that indicated that the

49 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC Treasury effectively thought that the introduction of the universal credit was just not achievable, certainly within the time scale and the financial limits that had already been set. Would anyone like to proffer an opinion on that particular comment? Was it just a bit of fluff in the newspapers? Was there a genuine dispute between DWP, the Treasury and indeed HMRC, or were you just piggy in the middle between two major Departments? Dave Hartnett: Stephen is closer, as the SRO for real time information, but both Stephen and I sit on a ministerial committee dealing with this, and I am not sure I would call it a bit of fluff in the media but, certainly, we did not recognise from the discussions that we had been involved in the descriptions that appeared. Stephen Banyard: We cannot comment on the universal credit programme because that is for DWP to comment on. What I can say is that I Mrs McGuire: But you are managing it. Stephen Banyard: I am responsible; I am accountable for the real time information programme, which provides the Q302 Mrs McGuire: So you are crucial to the delivery of the universal credit. Stephen Banyard: Absolutely. Q303 Mrs McGuire: Because if your information is wrong, then lots of people out there are going to find themselves in dire financial difficulties. Stephen Banyard: And we are very mindful of that. Q304 Mrs McGuire: I do not know whether or not the child tax credit legacy still looms hard and you have a big sign up saying, Please do not repeat what happened with the child tax credit situation. Stephen Banyard: We will put every emphasis that we can, which we are doing, on collecting and transmitting accurate data Q305 Chair: You re not doing anything on real-time information at the moment. That is one of the things that the Report says. The Report says that, because you have been trying to sort out both the PAYE numbers that we all get whatever you call it and the returns, you have done nothing on real-time information. Stephen Banyard: No, that is incorrect, Chair. We have a major programme running. I do not know where that comes from Chair: My reading of the Report. Stephen Banyard: But we have a substantial programme running on RTI, and I can reassure you Chair: You might have a policy, but your guys are busy pursuing and Q306 Mrs McGuire: Can I ask the NAO why? Are we misinterpreting what is in the Report? Stephen Banyard: Yes. Q307 Matthew Hancock: Which bit of the Report? John Thorpe: The commentary on RTI is in paragraphs 3.38 to We describe the programme and the time line in terms of how the Department is implementing RTI, so we just comment on the principal milestones. Our commentary is principally around the challenges around data quality and how those are being addressed. My understanding is that it is a separate programme from the work that is going on around the NPS stabilisation. Q308 Ian Swales: It says in 3.41 that the pilot phase runs from July to October so it should be completed in two weeks time prior to full implementation from November So how are we doing? Stephen Banyard: Can I help? The first thing to say is that we have done a lot on the new pay-as-you-earn system to improve data quality, and you will have read in the Report that the Department has repaired 11 million records. They were not wrong, but we needed to check to make sure. As a result of that, the tax codes that we issued this year the Committee will be concerned with this were very accurate compared with the inaccurate codes from the year before. We achieved an accuracy of over 98%. Another key indicator, and one that DWP are interested in, is how well the data coming in from employers matches into our systems, and whether it will drop into the right customer account. We have been working on that over the past two or three years, and we have increased its accuracy, in successive years, from 97.3% to 97.8% to 98.3%. The acceptance criterion for universal credit is 98%, so we have already achieved what universal credit needs from us. We are not content with that, and we have set up a separate data quality programme within the RTI programme. We are particularly looking to find out where the problems are arising, and we have developed a tool that enables us to look by employer to see where the problems are. Over the past three months, we have piloted 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 to them 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, but different organisations have different data needs. For example, you may work for the House of Commons and they have you down as Mrs A McGuire, but on our records you would be Mrs Anne McGuire, and something as simple as that can cause problems. We are working through with employers. We have a list of the employers who are likely to cause us most problems and we are working with them in a collaborative way to improve our and their data. Q309 Mrs McGuire: The thing that identifies me within the system is my national insurance number, so why do I even need to have my name there at all? I do not want to put it into the public domain at the moment, but I can give you my national insurance number off the top of my head I have had it for a long time. Stephen Banyard: And you are wonderful, but not everybody can do that.

50 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 26 Committee of Public Accounts: Evidence 17 October 2011 HMRC Q310 Mrs McGuire: All right. I am being a bit facetious here, but people do carry their national insurance numbers, and, frankly, I never cease to be amazed I do not know about my colleagues that when you ask a constituent for their national insurance number, they can just run it off the top of their head. Many people do know it. Is that not the identifier, and not whether I am Mrs Anne or Mrs A or, indeed, Mrs A McQuire, which I sometimes get and which is even more confusing? Dave Hartnett: It is the primary indicator, and many people do exactly what you do, Mrs McGuire. They know their national insurance number off by heart. Others no longer know their national insurance number. Others still have been given temporary national insurance numbers at some stage. You begin to see how the confusion can arise. Our challenge is to cleanse all that. Q311 Ian Swales: Just on this very point, in data quality terms, you talked about an acceptance criteria of 98%, so that is 2% error. How many errors would that be if you hit your acceptance criteria? A million? Stephen Banyard: The acceptance criteria are around data hitting the account first time. We then try to match it using our staff. The matching criteria that we use are normally name, NI number, address, date of birth and gender. It is important that we can match accurately. While we are not content with 98%, it is a good starting point. Q312 Mrs McGuire: Can I come back on the second part of my question, which was about the child benefit changes? What do you perceive to be the major challenges in implementing a real-time database to assess whether an individual or family are entitled to child benefit, under the new system that is coming in? Dave Hartnett: I think, Mrs McGuire, that the starting point is this: we have got to make system changes to deal with that, and we have until February or March next year to understand what those changes are once the policy design is completed, which is in the hands of our colleagues in the Treasury. It is hard to answer your question today. We do not envisage any special difficulties with real-time information and child benefit. Q313 Mrs McGuire: That does not strike me as a long read-in time to introduce something that will make 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 a long time. I hope we understand what the options might be, but there are still decisions to be made. Q315 Chair: But, to be clear, you have done no inyear changes. Para 23, page 8 of the NAO Report says you have put the resources into the recovery work. It states: This recovery work was extensive, covering over 11 million records A consequence of diverting operational resources to recovery is that some in-year changes to individuals records have not been processed. Dave Hartnett: But they are in-year changes to individuals pay-as-you-earn records, which, currently, will have nothing to do with child benefit. Q316 Chair: But they could have something to do with their tax. There may be overpayments or underpayments. Dave Hartnett: Indeed. Q317 Chair: So it will add to your overpaymentsunderpayments problem. Stephen Banyard: Nobody will pay the wrong tax at the end of the year. Q318 Chair: Why? Because you will do in-year changes? 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 give some context? The position we have faced is this concertina of work at the start. In-year information comes to us from three sources: people write to us some 9.5 million letters a year around 16 million people telephone us, and the computer throws up items for us to look at. Perhaps I should say this: 12 months ago we had a backlog of post, which was noted by the Committee. We are fully up to date with our post here. We have been working on it over the summer. 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 on hand. Q321 Chair: So do you reply within five days or do you open it after five days? Stephen Banyard: No. People will start replying to a letter, if it is urgent, at the five-day point. It will go out then. Q322 Chair: When will someone get a letter? That is what I am really after. That is what we, and the punters, care about. Stephen Banyard: You ought to get a letter well within 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, but we have got to that position. People will begin to see that in the autumn, because we have only just got there. We have also improved the telephone service. What we are left with are the work-management items, which are quite a mixed bag. Some of them are about data quality, which we have been talking about. For example, we may have a record that matches on four of the five items, but perhaps a character in the name is wrong. We will match the record and throw up a work-management item and ask whether it is right or wrong. It may be a compliance check, as we discussed earlier, such as a repayment. The system

51 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC will ask whether we want to check it. We set a level or criteria for checking. A lot of those work-management items are about information management. Some of those items relate to taxable benefits, such as company-paid health insurance or company cars, that have changed during the year we may not have worked through the items that come from the computer this year, so we will pick them up at the end of the year but that is the final piece of the jigsaw of trying to get pay-as-you-earn back up to date. We are carrying out a major review to address those work-management items and to determine which ones we actually need. Q325 Mrs McGuire: My final question is about the integration of child benefits into the real-time programme. Say that I am a school teacher with three children and that I get promoted in August, which takes me over the threshold. When will you catch up with me if I may put it in those terms and withdraw my child benefit? I bear the scars of the child tax credit, which left people with horrendous bills. I remember someone, although they were perhaps not in your position, Mr Hartnett, explaining that there is a difficulty with the culture of the HMRC because it is only used to collecting money, rather than giving money out. What is in front of those constituents who, during the tax year, flip over the point at which they are no longer entitled to child benefit? Potentially, significant sums of money are going to be withdrawn. Dave Hartnett: I agree. If we know that the child benefit needs to be withdrawn, there will be an in-year change; if we do not know, it will be dealt with in the following year. Q326 Chair: You won t force people to pay it back? Who loses out in Anne s example of a woman being promoted in September without the local authority telling you until the following April? Dave Hartnett: If the woman does not contact us to tell us of the change, there will be a tax charge for the year of promotion, but, where it is appropriate to do so, we will encourage people to take themselves out of child benefit. Chair: That is very unclear. Anne s example is quite good. Q327 Stella Creasy: Flipping it round the other way: what about the person who breaks up with their partner and becomes entitled to child benefit? How will you deal with that? Dave Hartnett: If we know that has happened, and if the person has come out of child benefit, we will put them back into it. Q328 Stella Creasy: How quickly can you operate that system? It sounds as if you will not make an adjustment until the following tax year for people who are no longer entitled to child benefit. How quickly will you be able to assess whether someone is entitled to child benefit? Dave Hartnett: If someone contacts us, we will be able to make such an assessment in a very short time. Q329 Stella Creasy: What s a short time? Dave Hartnett: Weeks at the maximum; perhaps even immediately. Q330 Stella Creasy: So how can you do it if they are entitled, but it will take longer if they are not entitled, therefore? Dave Hartnett: Because we re more likely to find out if someone is entitled than if they are not entitled. I think that s how it will happen. Q331 Matthew Hancock: May I push you a bit more on real-time and the change programme around that? You have described how you are catching up with the backlog within the existing system and how you are improving the data, to go up from 97.3% to 98.3%. Operationally, it is probably better described as a 2.7% error rate going down to 1.7%, because one is much bigger, but it s the proportion that matters. But there are other elements, particularly the link to the new universal credit, that are part of the change programme. How is that work proceeding? Stephen Banyard: The RTI programme is on track and we are confident that we can deliver on time. We have hit all of our recent milestones. We are running a 12-month live trial, and we have run workshops to start preparing 320 volunteer employers. We are on track to start the pilot in April, and it will run for 12 months, which will enable us to test the system. If Q332 Matthew Hancock: Excuse me. Are the 320 people all in work? Stephen Banyard: I said 320 employers, representing more than 1 million taxpayers. Q333 Matthew Hancock: Do you also include unemployed people in that trial? Stephen Banyard: This is a trial of the operation of pay-as-you-earn. Q334 Matthew Hancock: The real-time pay-as-youearn, rather than the DWP s end of it? Stephen Banyard: Yes. HMRC is responsible for delivering real-time pay-as-you-earn information. Q335 Matthew Hancock: But you are also jointly responsible for delivering a real-time link-up with the universal credit. Stephen Banyard: Indeed, and we will provide the information to them through that linkage. Q336 Matthew Hancock: And the milestones on that interface? Stephen Banyard: Yes, we are building that, and we are on time with all our IT. Q337 Matthew Hancock: How would you describe the working relationship with the DWP team that is doing the same? Stephen Banyard: First class. Matthew Hancock: I thought you might say that. Stephen Banyard: I would, and it is. Most of HMRC s programmes require us to work with a lot of stakeholders. The programmes that I have been involved in require me to work with tax agents,

52 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 28 Committee of Public Accounts: Evidence 17 October 2011 HMRC software manufacturers, employers and various groups. You don t deliver programmes unless you work well or try to work well with those groups. You need to do three things: first, share goals you need to know what you are trying to do and agree it. Secondly, you need good working mechanisms, such as steering groups. We have cross-representation, we have seconded people across each way and we meet regularly. Thirdly, you need good personal relationships and you need to trust each other. We have, from the outset, set out to build good personal relationships with the DWP team. Relationships are good. Q338 Ian Swales: Without wanting to go back over the ground that Mr Wharton covered earlier, we start from a position where anecdotally, your staff are not even allowed to, when they are inputting data, take information that they can see in front of them and use it to get the data right. If we are expecting to move to a situation where all these benefits and credits come together my question is about the management and governance of it, not just the systems. Taking the points that Mrs McGuire and Ms Creasy were making, it ought to be automatic in the future that you know when someone has reached a certain point in the tax system and then benefits change, and vice versa. If it isn t automatic, this whole new system is not going to work. My question is not just about whether the systems will do it, but what you are going to do about management, governance and control. Who is going to make the decisions and communicate these changes? Stephen Banyard: Can I take the child benefit part of the question first? Real-time information will help us on that, because even if you don t phone us up and tell us, we will spot that your income on a monthly rate has gone up and may have tripped the higher rate boundary. We would have governance around those sorts of things, perhaps to go in and ask the employer or you, Have you crossed the boundary? Q339 Ian Swales: But that s exactly the point. It all sounds extremely woolly and gentlemanly. The point is that something has changed and you know it has changed. Aren t you going to do something to avoid overpayments and underpayments? We might perhaps 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 right management structure around it. Stephen Banyard: I assure you that it will. We haven t operated a real-time system. We have to get used to it. Mrs McGuire: That s what worrying and concerning us. Q340 Stella Creasy: It s the postbag we re going to get from the family that breaks up, but which may still be under the same roof for a period or can t prove to you that they have broken up; or perhaps from a person who gets promoted but doesn t get their salary straight away. All those people will come to us in our surgeries and will be looking to us to help them sort out what s going on with you guys. Stephen Banyard: I understand that, but those are not hard facts. The real-time programme, if you bring that into it, gives us a facility to be able to spot those cases and intervene. Q341 Ian Swales: I don t necessarily expect you to read people s minds or understand everyone s social situation, but you have to be able to see data moving on tax and credit. Otherwise, the universal credit system isn t going to work. We need to have a system that works. Are we going to trip up over the fact that more than one Ministry is involved, for example, or is that all going to get sorted? Stephen Banyard: I hope we do not trip up over two Ministries being involved. We have put very good governance, which has been externally examined, around the programmes. As we move into implementation, that governance will have to adapt as we face new situations. Q342 Ian Swales: It is the operational governance I am talking about. I am not minimising the issue of getting the systems in place we all know that is going to be massive. But assuming success, are we confident that we will have operational governance that is fast and avoids the situations we have been talking about? Stephen Banyard: There will be and I accept the point. In a real-time world we will need to respond in real time to those sorts of situations. Q343 Stephen Barclay: This really follows on from Mr Swales s questions. Of the 54 projects in the change programme, how many have started? Dave Hartnett: Twenty-four have got Q344 Stephen Barclay: You are working on the business 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 full business cases for the 24 projects to deliver the 964 million. It is a really simple question. We have 54 projects in the change programme. John Keelty: I cannot give you the number immediately, although it may come. For example, on some of the reinvestment of the savings, we have already started recruiting people into various areas so that we can start those compliance projects going. We have already started to bring in more yield as a result of the reinvestment of the savings we are making this year. There are a number of projects that we have started this year. It is not the case that we are just planning. Yes, we are planning for some that will materialise in and beyond, but for those that we need to get going now, we are well on the way to doing that. Q346 Stephen Barclay: Sure, but that was not really my question. I appreciate that for 24 you are working out a business case, but what I am saying is that by 2015 you have to deliver 54 change programmes. That seems quite a lot for a department that has business

53 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC as usual and has other issues to address. Perhaps you could send us a note about how many of those have started. How many of those that have started are offtrack? John Keelty: Again, I am not aware of any but I do not have the precise details. We monitor these reports on a monthly basis, so what we get each month from them is to see their current status. As we work through them, there will be some that will be rated green absolutely perfect, no problems and there will be some that will be rated amber, where we need to do more work. I have run programmes before and that is what happens. Q347 Stephen Barclay: I fully appreciate that you have ratings; hence my question. Surely senior management has a sense, if you monitor it monthly, of how many of these 54 change programmes have started. We have less than four years to deliver them it seems a lot of work and it seems odd if senior management does not even know how many have started and how many are already behind schedule. John Keelty: We have just undertaken a mid-year review of the change programme and the conclusion we got from that is that we do not need any radical redesign or radical changes. Everything is moving in the way that we would expect it to move at this point in time. That does not answer your numbers question, but senior management at this time have seen that mid-year review and are comfortable that it is progressing in the way that we would expect it to progress. Q348 Stephen Barclay: Sure, but a 25% cost saving and those 24 projects are just under 1 billion, which suggests more than a bit of tinkering and modification. Perhaps we could look at external spend. Fifty-four change programmes suggests that you may need some external resource. I am very conscious that the Cabinet Office has strict controls around external spend. How much are you budgeting this year to spend on external resource for these change programmes? John Keelty: For consultancy we are budgeting about 5 million. Q349 Stephen Barclay: So 5 million on consultancy. What about other professional support? John Keelty: We have, of course, outsourced our IT development. So that is also being spent outside. We have outsourced our accommodation so we have quite large amounts that go out through that. Q350 Stephen Barclay: Okay. So legal spend, that sort of thing, do you have a total budget in mind to deliver? I am asking specifically about the change programmes because again, in previous hearings Mrs McGuire and Mr Swales talked about staff morale in HMRC. There is always the question around how much you spend on staff internally for the tax that you recover. There is a trade-off in terms of how much spend and what that brings in. As part of this change programme, which is to save money, what is the total quantum 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 with that figure. It s really important and it is an issue that Mr Barclay has raised, so you might have thought about it before you came, because we have raised it every time. John Keelty: Of course. Q352 Stephen Barclay: Again, this is not a new issue to the PAC, but another area is about staff moving mid-project and whether that links into deliverables. Can you assure us that for the 54 projects, all staff will have interim milestones and not be able to move prior to their milestones? I am not suggesting that staff should be in place until That is clearly not a sustainable position, because you need to keep people fresh and motivated. Can you at least assure the Committee that no staff moves for those running the projects will happen that are not linked to a deliverable milestone? Dave Hartnett: Let me pick that up, Mr Barclay. We don t aim for our programme and project managers to move, but some will. It is in the nature of a huge organisation such as ours that some of our very best people are managing those programmes and projects, and part of the task we have given them is to develop those behind them. Q353 Chair: I think our interest as a Committee is, do you aim to keep them there? The most frustrating thing we see as a Committee is that lack of responsibility and accountability. You come back three years later and somebody else is there. It is not that you aim for them to leave, but do you aim to keep them there? Dave Hartnett: We certainly do. Q354 Chair: Do you aim to keep them there? Dave Hartnett: We plan to keep them there, but all sorts of things can happen in those four years. It is perhaps worth adding that the major projects authority in the Cabinet Office has recently sponsored a starting gate review of our change programme, which has had many good things to say about the governance and how tightly we are managing it. I wanted to say, Mr Barclay, that you asked us how many were off track. I cannot remember the technical term for them, so can I call them hit squads? They go in when things go off track. To my knowledge others may need to correct me we have only done that twice and on some projects we are ahead of plan at the moment. Q355 Stephen Barclay: I wasn t suggesting that you could stop people leaving. Dave Hartnett: I understand that. Q356 Stephen Barclay: I am saying that for example the FiReControl project had five programme directors over six years, and a number of those moves were within the civil service. Interim milestones should be set, which are linked to people s appraisals and therefore to people moving. A thing that we repeatedly see on the Committee is that that is not being done. I do not get an assurance from your answer that that has been done in this case, but

54 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 30 Committee of Public Accounts: Evidence 17 October 2011 HMRC perhaps that could be taken away. Who is the senior responsible owner for the 54 projects? Dave Hartnett: Lesley Strathie. Q357 Stephen Barclay: And she s not in post at the moment. She s off, is she not? Dave Hartnett: She is off at the minute and Mike Clasper has filled that role while she has been away. Q358 Stephen Barclay: Right, and she will resume that as SRO. Dave Hartnett: Yes, that s the plan. Q359 Stephen Barclay: And how will she, given her other duties, get oversight of 54 projects? Dave Hartnett: We have a core project team, which is stronger probably than we have ever put into any programme before, and the starting gate review confirmed that. Our CIO is the change director. He and his team are leading the oversight. Q360 Stephen Barclay: So if she is personally responsible, which an SRO is, how many of the 54 projects would need to go wrong for her to be held seriously responsible from a career perspective? Dave Hartnett: I don t think I know the answer to that, Mr Barclay, largely because we do not plan for any of them to go seriously wrong. One of the key messages from the recent review is that the governance is in really good shape and would identify things like that, and we would act quickly. Q361 Stephen Barclay: Should you not plan? It is the nature of projects that if you are running 54 projects, some will go wrong. We have two PAC hearings a week because so many projects, sadly, go wrong. It seems to be a leap of blind faith to assume that all 54 projects will go well. Dave Hartnett: Not at all. One thing we have learned time and again from the NAO is that it is all too easy to be over-optimistic and that is exactly what we are trying not to do. Q362 Chair: Can I come in on that? Following on from that, you have no contingency at all. You were set a financial cuts target. You are working entirely on the assumption that you will achieve them all with absolutely 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. You have no contingency plans. Of course, you must achieve the financial cuts; that is an imperative from the Treasury. You have no contingency plans for alternative ways in which to achieve those financial cuts other than the 54 projects and the other bit. Dave Hartnett: No, since the NAO review, and during it, we have developed other plans as to what we might do if we needed a contingency. Q364 Chair: They are not in the NAO Report, are they? Dave Hartnett: No, because our thinking on this is very 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 are doing? For example, we could speed up the reduction of the number of buildings that we occupy. We can speed up our process change in our tax systems and in our PaceSetter work as well. Those are the sorts of areas in which we would find contingency. It is important to say that we have a proud record of delivering the savings that we set out. Q366 Chair: No, you don t. We looked at that. The very first Report that we looked at across Government was the performance of all Departments in relation to the 5% year-on-year cuts in the last spending review. I m looking for the figure. Perhaps the NAO can help me. On page 16, paragraph 1.15, it says that 12.6% of savings were not evidenced, not new and not reported net of ongoing costs. So, you don t have a proud record. John Keelty: That review took place at the halfway point when we had planned only to realise something like 40% of the savings. Q367 Chair: What that review showed was the savings that you had reported. It was not showing the savings that you hadn t reported. These were savings you had reported and 12.6% of them were not evidenced, not new and not reported net of ongoing costs. John Keelty: By the criteria, that is absolutely right, but this was halfway through that SRO7 efficiency programme. We learned from that. Q368 Chair: Well, I rather resent you saying, We have a proud record. The last time we looked at this we found that our 12.5% were again not evidenced. John Keelty: Some 87% of them were sustainable efficiency savings. Chair: You should not be putting up savings and pretending that there are savings when they are not evidenced. That is not how any public servant in any Department should be operating. Q369 Mr Bacon: Mr Hartnett, you have said that, prompted by the NAO, you are now doing something about the contingency. Why did it require the prompting of the NAO to do something about the contingency? Dave Hartnett: We were actually thinking about where we would have back-up for our cost-savings project if any started to go wrong. The engagement with the NAO on the cost-saving Report was significant. It made a number of recommendations. Q370 Mr Bacon: And one of them was about contingency? Dave Hartnett: One of them was an observation about contingency. Q371 Mr Bacon: What interests me is that the failure to have contingency is a hardy perennial. Among the many mistakes that the Rural Payments Agency made was the failure to have a contingency plan. Actually, in that particular case, it had one and then it scrapped it. Such behaviour is commonplace, and we have seen

55 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC it many times. Folk come to this Committee with projects that have gone wrong and where there was no contingency plan. I would hope that by now tattooed on the eyelids of permanent secretaries are the words, among many others, Make sure you have a contingency plan. Therefore, why did it require the prompting of the NAO for people to think, Hey, we need a contingency plan. Why was it not already so deeply embedded in the DNA that the NAO noticed and commented on the fact that there was a robust contingency plan? Why was it not that way round? Dave Hartnett: Because we wanted to get our change programme going. We knew we had to do this, and the NAO helped us Q372 Mr Bacon: You make it sound like because you were in a hurry. The Rural Payments Agency was in a hurry; it was in such a hurry that it chose the shortest of all the available timetables, as well as choosing the most complicated of all the possible payment systems. But the evidence is over many projects 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 did it require the NAO to prompt you to have a contingency? Dave Hartnett: The crucial thing for us, Mr Bacon, was to make sure we understood the risks. That can be done certainly without cash contingency. There was some thought that maybe we should have had some cash contingency, and we could not do it, which is now why we have looked in the other areas that I have mentioned. Q374 Chair: And 36% of your current proposals new cost reductions are in the final year, so if you fail on those, you ve had it. Dave Hartnett: If we fail. Q375 Matthew Hancock: One thing that came out of that is that you mentioned that part of your contingency is to do more on buildings and make greater savings there. I wonder why you are not doing that anyway. Dave Hartnett: Well, we are. Q376 Matthew Hancock: Hold on. You cannot be doing the same amount as is in your contingency. You must be doing more. Dave Hartnett: No. We are doing a lot on buildings. What we can do, Mr Hancock, is to speed it up. Let me tell you the record for last year. I think we achieved 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, why don t you deliver them? Dave Hartnett: Well, we are trying to do that. Q378 Chair: I have to say that as an Arts Minister I spent for ever trying to get you out of Somerset House. We finally succeeded and put it to better use, but you were very, very, very late in getting out of there. Mr Bacon: Your fingernail marks are all over the outside of the building. Dave Hartnett: We are about to mothball it to save our costs. Q379 Chair: Can I raise two other issues that are of concern to me? One is that you are assuming a cut in sickness absence, from your assumption of 9.9 days in to 7.9 in Did you achieve your target? Stephen Banyard: We very nearly achieved the sickness absence target last year, or we hit it, and this year we are in front of profile for getting down, so we believe 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 and we achieved 11.01, but we are currently tracking at 8.3. Q381 Chair: The figure I have got here for sickness absence in is 9.9. Stephen Banyard: I was speaking for my own area. Q382 Chair: And by 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 average of 9 days per person in , which the Department did not achieve. I am not sure how far it was below it. Q383 Chair: And you were at 9.9. So it is not very nearly 10% is not nearly, on these figures. Stephen Banyard: I gave you the answer for my own area, which is about third of the Department. We made a substantial reduction last year. We did not hit the target, but I am confident that we will beat the target this year. Q384 Chair: Okay. I understand that you looked at your bit. Mr Keelty, you have some responsibility. You are here answering for this whole change programme, where you do not know where you are on the 54 projects. I picked up that you have assumed a cut in sickness absence. I also picked up that you failed to achieve that in I want to know what you have done in , and I want to know how viable your assessment of the cash savings is. John Keelty: At this point in 2011 for the Department as a whole we are tracking at 8.7 days, and our target is 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 cash savings. So we can hold you, Mr Keelty, to account, if you don t achieve that. Is that right? Or do we hold Mr Hartnett to account? Dave Hartnett: I think you hold the accounting officer to account, so that would be Lesley or me. Q386 Mr Bacon: Mr Keelty, when you say that you re on target Stephen Barclay: You re not on target.

56 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 32 Committee of Public Accounts: Evidence 17 October 2011 HMRC 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 you know who is going to be ill on 12 December or next January? How do you know there is not going to be an outbreak of measles or flu or avian flu? Stephen Banyard: We don t. What we do is to look at seasonal patterns. We are trying to reduce sickness absence, so we are looking at where we have now got to. The figures you have been given are the 12 months up to a certain point today. Those figures are falling fast because the figures in current months are very much lower than they were a year ago. Q387 Chair: If you know that, why don t you know what the figure is? John Keelty: The 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 the figure? John Keelty: I believe that is Chair: was Q389 Mrs McGuire: is 8.7. Is that year-onyear or is that from 1 April? Ian Swales: They are rolling. John Keelty: These are rolling trends. I have just been passed a note: was 9.65 days, and was Q390 Chair: Do you agree with that? Jane Wheeler: We have 9.9 days for in the report paragraph 2.18, final bullet. That is against the average of 7 point Q391 Chair: Seven point what? Across Government? Don t talk about the private sector. Jane Wheeler: The cross-government figure was 8.5 for year ending September Q392 Stephen Barclay: The reality is that you set a target for and you missed that target. Having set a target, you missed it. You are now about to embark on a major change programme. Do you think a major change programme in isolation will improve or worsen potential sickness rates? John Keelty: During the beginning part of this year we did a lot around improving the mechanisms and processes for recording sick leave and generally improving it. If we see the tracking for this year, since we introduced that initiative in the Department, the sickness leave has dropped substantially. Q393 Stephen Barclay: Again, with respect, you are not answering the question I put. My question was not, Is the trend moving in the right direction? I would hope, given the focus the Department is placing on sickness, that the trend would be moving. It is pleasing to hear, and the Department deserves praise for achieving that. That is good news. The point that I think the Chair was driving at is that you set a very aggressive savings target related to sickness, without any contingency, if that is not achieved. Therefore, that saving will have to come from somewhere else if it is not achieved. While past performance is not a guarantor of future performance, given that this target related to a higher target than the eventual one, it should have been easier to achieve than the eventual one. The point is that, going on your performance to date, you set a target and missed it. Looking ahead, there is going to be a shortfall in the savings. There is no contingency allocated. The question for the Committee must be, Where else are you going to get that money? John Keelty: The failure of the target was not in the spending review period. That is the first thing. Q394 Stephen Barclay: No, but your starting point is higher. John Keelty: We are on track this year for the revised target that we set, irrespective of the achievement that we got in Q395 Stephen Barclay: Sure, but you start from a higher point. So the delivery, the savings, the improvement you need to achieve, are increased, because you are starting from a worse point. John Keelty: Absolutely, and we are on target to hit those savings. Q396 Mr Bacon: Are we basically saying that the head count you are planning for is predicated on this particular level of sickness absence, and that is how the saving is achieved? Is that right? John Keelty: Sorry, I am not sure I understand the question. Q397 Mr Bacon: If I know that in my organisation I am going to have a 1% sickness absence, I know that I need fewer people to achieve the same amount of work because only 1% of them will be absent during a calendar year than would be the case if I knew that 7.9% were going to be absent. Are you basically saying that in doing your sums, you work out how many people you need and, predicated on a reduction in the sickness absence, you come to the conclusion that you need slightly fewer people, because your sickness absence is down? John Keelty: Yes. Q398 Mr Bacon: Right. Presumably, if you do not achieve your target, it is not in the end a question of money, because the people will have gone. The answer is an increase in backlog, isn t it? It is a reduction 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 of that. You intend to cut your staff by 19,000. John Keelty: No, we intend to cut them over the spending review period by 10,000. Q400 Chair: No 19,000, and then recruit 9,000. You have almost given away the first bit of the question. The 9,000 you are recruiting are all going to be redeployments out of the 19,000, are they?

57 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC John Keelty: Virtually all, yes. Q401 Chair: How interesting. You are not taking the opportunity perhaps to change the quality or calibre of your staff; you are just going to move staff around the place in-house. We will take that as read. You are cutting the staff on personal taxation by 50%. John Keelty: Not 50%. Dave Hartnett: It is 34%. Q402 Chair: Sorry you are cutting by 34%. What have you done about modelling that in terms of a rise in non-compliance? Dave Hartnett: We have done quite complicated modelling. Our top priority in relation to the reduction in staff in personal tax has been to minimise it in the first two years, so that we can complete the stabilisation of pay-as-you-earn, and to back-load. I will ask Stephen to come in, but our basic strategy is to continue to improve the performance of pay-asyou-earn to take savings from more effective processing through NPS. For example, last year, we were addressing eight tax years in one year, whereas normally for pay-as-you-earn we want to be addressing three: the end-of-year reconciliation for one year, the coding for the next year and in-year changes for another one. That will be a huge efficiency for us. Q403 Chair: I understand that you think the workload will go down, because you will have dealt with the backlog. In effect, that is what you are telling us. But have you done an assessment for such a massive reduction in staff in the one section, and what it will mean for non-compliance? Have you modelled that? Stephen Banyard: We do not believe it will have an effect Q404 Chair: At all? Stephen Banyard: We do not believe so. Our first priority is to stabilise pay-as-you-earn. In the first two years, we are not planning to take many savings out of this area at all. In fact, we have put additional staff in to try to get the place up to date. The savings are back-loaded to years 3 and 4. They fall into a number of areas. Q405 Chair: Mr Banyard, have you actually modelled it? I ask because one of the criticisms is that the NAO thinks you have a decent understanding of your costs, but in going forward you do not understand the relationship between expenditure and outcomes. I don t quite know how you put it, but there is a way in which they put it in the report Jane Wheeler: The relationship between cost and value. Q406 Chair: Thank you. I have taken this as an example of where you are going for a huge change a 34% cut because you think you will have dealt with the backlog and the system will have settled down. I really want to know whether you have modelled it. Or is this Committee going to come back to this in 2014, when we will still be the same Committee, and find that your non-compliance has gone up? Dave Hartnett: We have done the modelling. 1 We are also wary that there is a risk that voluntary compliance might drop. Q407 Chair: By what? Dave Hartnett: A few percentage points. Q408 Chair: What? Can we see that? Can the NAO see the paper setting that out? What percentage? Q409 Mr Bacon: A very small percentage could amount 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 can understand that. We all share that and we welcome it. But you are cutting your staff by 36%. You are going to have dealt with the backlog. We need to know what you think that means non-compliance will go up by. What percentage? What total? You have done the work. You ought to be able to share the papers with the NAO, which can then reflect that in its report. Stephen Banyard: We have a new operating model for pay-as-you-earn operating under NPS. The system is new, and for the first time we have a wholecustomer view. Our new operating model is therefore built around a completely new rendering of pay-asyou-earn. We are learning about that as we go along. Q411 Chair: So you have not yet done the modelling to 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 the data 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 just said that you are expecting voluntary non-compliance to go up by a few percentage points. Q412 Mrs McGuire: Could you explain what a full customer means rather than a half customer or a quarter customer? Stephen Banyard: I can. Pay-as-you-earn was computerised in the mid-1980s, and it was computerised on the basis of employments. If you had an employment with someone, that employment information would be held on one of 12 regional databases. If you had two employments, the second employment could well be held on another database, and the only connection between them was pieces of paper. Q413 Mrs McGuire: So you are looking at me now as an individual as opposed to an employee? Stephen Banyard: Indeed. If you phoned our call centre Q414 Mrs McGuire: Assuming I could get through. 1 Real Time Information will improve voluntary PAYE compliance because reporting to HMRC will be integrated into the payroll process and employers will know that HMRC has earlier visibility of payments due

58 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 34 Committee of Public Accounts: Evidence 17 October 2011 HMRC Stephen Banyard: Our staff would bring up your record for you and look at all your employments, as they do, and make the whole pay-as-you-earn tax right. 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 facility to take on temporary staff when, for example, you have a sickness absence gap that was larger than you expected and therefore you have a backlog growing? Can you take on temporary staff to help sort out the problem? Stephen Banyard: We can and we do, and we train them 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 do you get them from? Stephen Banyard: We do not get them in the sense of temporary come-and-go; we would recruit people for a term appointment. Q418 Mr Bacon: I see on a fixed-term contract. Stephen Banyard: On a fixed-term contract. We would bring them in for 11 months or 23 months, and we would give them full training. We have not had difficulty recruiting good people. Q419 Mr Bacon: Why 11 or 23? So they cannot sue you for unfair dismissal? Stephen Banyard: We have recruited for 23 months because that is the period we think we will need people for. Q420 Stephen Barclay: How many people have you hired externally in the past 12 months? Stephen Banyard: People or full-time equivalents? Q421 Stephen Barclay: How many people have you hired externally? Stephen Banyard: All of our staff have been recruited externally at some point. Q422 Stephen Barclay: No, I said in the past 12 months. You are reducing head count to make staff savings. Over the past 12 months, how many people have you hired externally? Stephen Banyard: In terms of people, rather than fulltime equivalents, approximately 2,500. Q423 Stephen Barclay: Right. I am conscious of the Cabinet Office freeze on external recruitment, but all those 2,000 people are defined as essential front-line staff? Stephen Banyard: They are essential front-line staff, and they are helping us to get pay-as-you-earn up to date. We are determined to deliver a good system and a good service to the public, and that is how we are doing it. Chair: As Stephen has just said, if you look at page 26, paragraph 2.20 Q424 Stephen Barclay: Just coming back to that again, it is highlighted in the report, which states, at paragraph 2.20, Wider experience indicates that organisations tend to over-estimate how much their cost reduction plans will actually save and best practice is to identify a contingency of 50 per cent. What level of contingency are you planning to identify? Dave Hartnett: At the moment, certainly not 50%. Chair: What? Q425 Stephen Barclay: So you are not following best 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? You said that you are now planning contingency, so what level 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 specific number. As Dave says, we are monitoring the risk and we will adjust things as we get to them. Chair: This is very waffly. Q428 Mr Bacon: May I labour the point about the Rural Payments Agency? It introduced an enormous change programme at the same time as sacking all their most experienced staff and replacing them with temporary workers. You say that you are monitoring the risks, and it is good to hear that you are. What do you do about it when you identify that a risk that you have been monitoring has materialised? What happens next? John Keelty: That is a very difficult question, because it could be any sort of risk. But as soon as that risk becomes an issue and we need to take action, we will certainly consider what is the appropriate action to take. It might be right to move another programme forward or, if the risk is a shortage of staff we have 66,000 staff in the Department we might have to move some staff from over there to here to help with that programme. Q429 Stephen Barclay: Where you have identified savings, are you not moving as quickly as you can on those? From your answer to Mr Hancock s question about property and to Mr Bacon, your contingency seems to be, Ah well, we can speed up other programmes to deliver other savings. Mr Bacon: Move things forward. Stephen Barclay: Surely you would be delivering those as quickly as possible anyway. John Keelty: We have a history of handling large programmes we are a large Department handling large change. Throughout the past few years, as necessary, when things ebb and flow, we adjust our programmes accordingly. I am having difficulty answering your question, because it is a largely hypothetical situation. Chair: Okay. Maybe the Comptroller and Auditor General can put it in another way.

59 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC Amyas Morse: I will try to. Everything you ve just said is fair you have a large Department and you have a record of handling large programmes. It is also fair to say that you have been able to take a reasonable amount of time over doing that. That is not a criticism; it s just a factual statement and, I think, a fair comment. You now move into an era in which you are trying to change a lot faster than you were. I think that is fair to say. Dave Hartnett: It is. Amyas Morse: And you have been able to carry out what I call fairly discrete change programmes, but now the connection between one another is becoming much closer. So what we are trying to say I urge you to consider this and I shall be interested to hear your reaction is that you must be able to react early, to understand the linkages early and to get whatever actions you are going to take into place in time to retrieve the situation before the performance gap is too great. It is not that we do not think you are trying to tackle those things, but you could do with developing a more sophisticated and integrated approach as early as possible. John Keelty: We do recognise the need to look at the risk and take an integrated approach. You have recognised in your Report that we are setting up the governance arrangements to do that. The question is: can we set aside a chunk of money for the eventuality that something might happen? As a Government Department in times of austerity, finding a chunk of money that you can just set aside is extremely difficult. The Government want to use that money in other ways. Amyas Morse: I have every sympathy with what you have said. A chunk of money not doing anything should be as small as possible. But that is a result of how fast you can react how quickly you can spot if you are off plan. We are talking about what you would do. How big a gap is there from flash to bang? If something is off track, are you geared up to react really 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 any suggestion that a project is starting to go that way. With regular, weekly reporting, we have put change directors into each of our major business areas, and that monitoring process is working very effectively. Q430 Mrs McGuire: But it is not about identifying the risk or the problems; it is about how quickly you can react. Is HMRC now flexible enough to give a far quicker response when a risk is identifiable? Have you learned any lessons, dare I say it, from the child tax credit fiasco, where the risks were obvious to everyone and HMRC was so far behind the curve that people are still recovering from the damage done? I wonder what business people listening to this exchange would think of it, because HMRC demands precise information, yet there is a lot of woolliness in our discussion this afternoon. We have heard, Contingencies are not there. We are not sure what we will 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 s financial viability will depend on your being flexible enough. Frankly, I do not think that you have given us much confidence today that you do have that flexibility. Maybe I am alone in that. Amyas Morse: May I just make one comment? I was listening to a presentation recently by your change director, Phil Pavitt is that right? Dave Hartnett: Yes. Chief information officer and change director. Amyas Morse: I have to say that if the performance matches everything that he was saying I am sure that it does then it sounded pretty impressive to me. Chair: He is not giving evidence to us Amyas Mrs McGuire: There is always a gap between rhetoric and delivery. We have three senior people here from HMRC and I am just not getting enough from them, which makes me feel that, within the next two or three years, they will be implementing major changes in terms of the flexibility of response. Q431 Chair: I think Anne has summed up the view of the Committee very precisely. I want to ask a final thing on tax credits. My understanding is that the current debt is 4.7 billion. I have two questions. How much of that is due to customer error, and how much is down to HMRC error? Dave Hartnett: Most of it is due to customer error or worse. Q432 Chair: What proportion? Dave Hartnett: I will have to write to you, because I cannot 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 be wrong: 80%. Q435 Chair: So that is customer error. How much is realisable out of that 4.7 billion? Dave Hartnett: We think probably something of the order of three to three and a half currently, but we are working on that. We have taken a new approach to debt generally, and we are aiming to reduce the debt to 3.7 billion by the end of the spending review. Q436 Chair: It is going up at the moment. You will reduce the debt by getting the calculation right in the first place with this cohort of people, not by pursuing the debt. My understanding of paragraph 38 on page 11 is that you have only collected 380 million against your target of 550 million. So you are 50% down on your target. Then there is this funny little sentence in the 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 a substantial number. Q437 Chair: 1.7 billion? Dave Hartnett: I am trying to find it in the Report. Currently, we are remitting billion relating to tax credit customers and that is in relation to debts incurred between and , where we

60 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 36 Committee of Public Accounts: Evidence 17 October 2011 HMRC have received no payment in the past 12 months, and some of those people we cannot find. Q438 Chair: So we have lost over a billion, and we might lose another 700 million or whatever it is. Dave Hartnett: I don t know yet. Q439 Chair: When are you going to take that decision? Dave Hartnett: Whether to remit the billion? Q440 Chair: No. There is a figure in the Report. I think 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. The Department estimates that 1.7 billion of new tax credits 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 on the Department s own calculations, without any further intervention or action to reduce debt, debts could increase to 7.4 billion by Dave Hartnett: I am terribly sorry. I have forgotten the question. Q441 Chair: It s a heck of a lot of money is what we are saying. My own view, which I am sure is shared by the Committee, is that the only way you really get this right is by getting the calculation right in the first place, not by trying to pursue really poor people. Dave Hartnett: I agree, and our strategy is to help our customers and ensure that our calculations are right in the 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 things about tax credits. Just to put this into context, what is the entire operating cost of HMRC, just to the nearest 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 to have that number in context when we are talking about the size of these numbers. John Keelty: 2.2 billion. Ian Swales: 2.2 billion is the staff cost. Your entire staff costs are 2.2 billion Q446 Chair: And the rest takes you up to? That is huge. What was your original figure to Ian? John Keelty: 3.5 billion, so on IT and accommodation Ian Swales: 3.5 billion, so that is all the other costs of offices and so on. Chair: A third and two thirds, really. Q447 Ian Swales: Okay. I just want to pull out a few figures from this. It says in paragraph 33, page 10, that you have a target to reduce tax credits error and fraud to no more than 5%. My calculation is that that is about 1.4 billion that is your target to get down to, for errors and frauds. Is that a fair assumption? I am taking 5% of the 28 billion spent on tax credits in the previous paragraph. Dave Hartnett: We actually have a higher target each year, Mr Swales, because the number of new claims coming into the tax credit system is about 20% a year. So our target is to bring this down by 1.4 billion by , but we will do that by tackling error and fraud at roughly 2 billion a year. We have changed the whole strategy to do that. Whereas you heard Stephen Banyard talk earlier on about process now, check later, the big change in tax credits is to check now, process afterwards. Q448 Ian Swales: It says: The Department has a target to reduce Tax Credits error and fraud to no more than 5%, so what are we talking about? Some 1.5 billion or so as your target is that right, or have I got the wrong number? What would your target be? Dave Hartnett: 1.4 billion. Q449 Ian Swales: So it is 1.4 billion that was the first figure I said. Okay. So that is one figure that is important. Let us then move to the one that the Chair just mentioned, which is that you are going to assess in paragraph 38, on the facing page the value for money of collecting 1.7 billion of tax credits debt not under active recovery. Can you just talk us through how you are going to assess the value for money of collecting that debt? Dave Hartnett: Broadly, we assess the value for money by looking at what we think we are going to recover as against the cost of the actual recovery. That is a balance that we are making all the time in the area of tax credit. Q450 Ian Swales: So when you say the cost of making the recovery, what kind of things are we talking about? People and resources, presumably. Dave Hartnett: People and resources. We have outsourced some debt collection to debt collection agencies. 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 whole business. Stephen Barclay: Well, it was 214 million between 27 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, if you are adding an extra level of new tax debt of 1.5 billion in a year, and you are getting 57 million through recovery, it doesn t take Einstein to work out how those two graphs are going to diverge, does it?

61 cobber Pack: U PL: COE1 [O] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Committee of Public Accounts: Evidence Ev October 2011 HMRC Ian Swales: In fact, the Report says that without any further intervention tax credits debts could increase to 7.4 billion by That is in paragraph 37. So what intervention are you going to make? Dave Hartnett: We have changed our approach to managing tax credits. The four key things are: first, checking first, paying second; secondly, reviewing the risky areas of tax credit, such as the cost of child care, which is one of our highest risk areas; third, by having a process of cleansing, which is automatic checking of claims when they are made, for which we have a new risk tool; and, finally, ensuring that we improve the training of our people and how they work with claimants, so that there is less over-claiming. Q454 Ian Swales: Okay. Much nearer the end of the Report, on page 46, in the detailed tax credit area, it discusses your having launched a joint fraud and error strategy with the Department for Work and Pensions, targeting 8 billion of tax credit losses over the next four 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 10 people? 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 something that is about 8 billion of your tax credit losses. I would have thought that you would know something about this project that you have set up. Do you have any metrics at all on it? Dave Hartnett: Not today, I am afraid. I am very sorry. Chair: Very finally Dave Hartnett: The information has come from behind. We have 1,700 people or full-time equivalents in tax credits working on compliance activities. Chair: That is on tax credit. Q458 Ian Swales: Is that on this joint project with the Department for Work and Pensions? Dave Hartnett: No, we do not have that number with us. Q459 Ian Swales: Could you write to us? Dave Hartnett: Of course. Q460 Ian Swales: I made the context-setting remark at the start that the entire manpower of HMRC cost only 2.2 billion. My final question is: if you had your time again, would you have cut your staff in HMRC as fast as you did? Do you need to revisit your future staffing strategy in the light of all the issues that we have discussed today? Dave Hartnett: There is a real balance there. If you have 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 compliance yield 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. We have taken our debt balance down by 3 billion to 4 billion. 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 gap that we have talked about before. Dave Hartnett: No, Mr Swales. We are constantly looking for projects. Whether we can get the funding for them is another matter. Some of our offshore work in the last week we have made it public how we are approaching the 6,000 account holders in a particular Swiss bank we will be looking to fund. Q462 Ian Swales: Thinking about some of the things that we have spoken about this afternoon, have you raised any invest to save projects with the Treasury that have been turned down? Dave Hartnett: Not that I can recall. The reason for that is that we want to demonstrate clearly what we can do with the 917 million first. We are ahead of profile in what we promised to deliver. Q463 Ian Swales: But the 900 million, as I understand 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 a question, it is very misleading to talk about the compliance yield in isolation. What Mr Swales was driving at was the cost of staff compared to the amount of tax missed that could have been collected. If a company owes 5 billion in tax and you do a handshake deal with them for 1 billion, the compliance yield looks exceedingly good we have brought in 1 billion. What it does not show is that we have lost 4 billion. So talking just about the compliance yield does not address the point that Mr Swales was driving at, does it? Dave Hartnett: I think, Mr Barclay, that you know that I am going to say this: we don t do handshake deals. I cannot think of a case like the one you have just described. Q465 Stephen Barclay: I was just quoting internal notes. Whether it is done on a handshake or done through governance, the point stands. In talking about the compliance yield in terms of the optimum level of staff as against the amount of tax you collect, we also need to see how much tax could have been collected but 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 broader point that Mr Swales raised. Something bugged me during the discussion on the savings that you are making and the contingency, which is linked to this point. Could you set out clearly where you are on the milestones to achieving that? The contingency is an

62 cobber Pack: U PL: COE1 [E] Processed: [ :28] Job: Unit: PG02 Source: /MILES/PKU/INPUT/016824/016824_o002_015792_o002_016106_o001_db_CORRECTED TRANSCRIPT.xml Ev 38 Committee of Public Accounts: Evidence 17 October 2011 HMRC important question, but I don t think we got you on the record in that discussion with where you are up to in 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 on track? John Keelty: We believe that we are on track, yes. Q467 Matthew Hancock: You believe that you are on track, or you are on track? John Keelty: The mid-term review that we had of the change programme showed that we were on track. Like all big programmes, we need to take action to make sure that we keep going on the right track. That Report said that we didn t need to make any major changes to the direction we were heading in. So we are on track. With the large portfolios of change, there will 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 you very much for coming, and I am afraid to say that I think that there will probably be some more in the near future.

63 cobber Pack: U PL: COE1 [SO] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 39 Monday 7 November 2011 Members present: Margaret Hodge (Chair) Mr Richard Bacon Stephen Barclay Meg Hillier Fiona Mactaggart Austin Mitchell Ian Swales James Wharton Paula Diggle, Treasury Officer of Accounts, Paul Keane, Director, National Audit Office, and Amyas Morse, Comptroller and Auditor General, gave evidence. Gabrielle Cohen, Assistant Auditor General, NAO, was in attendance. REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HM Revenue and Customs Accounts Examination of Witness Witness: Anthony Inglese, General Counsel and Solicitor, HMRC. Q468 Chair: Welcome. I gather this is your first appearance before a Select Committee, so I hope you do not find it too onerous. I hope that we won t take up too much of your time, but it depends on how the questioning proceeds. May I refer you first to the note of the meeting of 8 December 2010 in your offices? Can you tell the Committee whether those minutes are correct? Anthony Inglese: May I say at the beginning, Chair, on that note that I cannot comment on the contents of the document? It was prepared as an aide-mémoire by two Q469 Chair: Why can t you comment? Anthony Inglese: For various reasons. I think the Committee understands the constraint I am under. It s a note that Q470 Chair: No, we don t quite. Anthony Inglese: It is a note that is legally privileged and it also Q471 Chair: Why is it legally privileged? Anthony Inglese: Because it was part of the evidence gathering 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 you are also a civil servant, are you not? Anthony Inglese: Yes, I am. Q474 Chair: As a civil servant, to whom you are accountable? Anthony Inglese: I am accountable to my department. Q475 Chair: No, you re not. You re accountable to Parliament. Anthony Inglese: But I do believe the Committee understands the constraint I m under Q476 Chair: No, we don t, actually. We think that you, as a civil servant, are accountable to Parliament. If there are issues in the public interest, it is beholden on 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 end with you being here for rather longer than we had hoped, it would help if you could actually answer them. Anthony Inglese: I would very much like to try to help the Committee, Madam Chair, but there are some constraints that I am under. May I tell you how I can help the Committee? Q477 Chair: You have explained that you have given advice to another officer of the Crown, who is also accountable to Parliament namely, the department or Mr Hartnett or whoever so we consider that both of you are civil servants, both of you are accountable to Parliament, and both of you should give us an account of yourselves and the content as well as the process. I do not see how you can quarrel with that interpretation. Anthony Inglese: Can I begin by talking about the process? Q478 Chair: No, you can begin by answering the questions. You have said that you feel you cannot answer all the questions. You said one of your constraints was that you gave advice to the department. You agreed you are a civil servant; you are therefore accountable to Parliament. Any other constraints, Mr Inglese? Anthony Inglese: I would like to be able to say something, and I can go on to say something more helpful, but the constraints that I am under, as well as legal privilege Q479 Chair: I do not understand the legal privilege point. I have just said to you that the legal privilege point is not a point, because you are civil servants,

64 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 40 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office and you were giving advice to a civil servant who is accountable to Parliament. Anthony Inglese: There are conventions in Parliament about what can be answered on legal privilege Ministers, for example. There are various ramifications of the legal privilege point. At the moment, there is a judicial review being brought against HMRC. Q480 Mr Bacon: Oh, really? Can you give us the case number, please? Anthony Inglese: We have had the pre-action protocol letter by a pressure group and we are now looking at our response. Q481 Mr Bacon: Are there any proceedings? Anthony Inglese: Proceedings are imminent. Q482 Mr Bacon: What is the answer to my question? 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 judice rule, we have had a letter before action Q484 Mr Bacon: Yes, I understand that you have had a letter before action. Once again, what is the answer to my question: are there any proceedings before the courts? Anthony Inglese: Proceedings are imminent. Q485 Mr Bacon: Are there any proceedings before the courts now? Yes or no? Anthony Inglese: At this moment, no. Q486 Chair: Can I draw your attention to Erskine May? I want to draw your attention to two things before we get on to the matter in relation to proceedings. Erskine May explains that when matters are considered sub judice: Civil proceedings are active when arrangements for the hearing, such as the setting down for a case for trial, have been made, until the proceedings are ended by judgment or discontinuance. In your answer to Mr Bacon s questions, there are no proceedings, so this is not sub judice. Erskine May then goes further: where a ministerial decision is in question, indeed, this is not a ministerial decision; it is an official decision or in the opinion of the Chair that is me a case concerns issues of national importance reference to the issues or the case may be made in motions, debates or questions. So under Erskine May, I put it to you, Mr Inglese, that you ought to be answering our questions fully. Anthony Inglese: Chair, with the greatest of respect, I cannot answer those questions. I am under the constraints of legal professional privilege, which is a privilege that I owe to my clients. Q487 Chair: Are you saying that you as a civil servant override Erskine May? You are a civil servant, Mr Inglese. You are here as a civil servant. Anthony Inglese: My understanding of the rules is that they apply where proceedings the type of case that a judicial review is involved in involve a protocol before action, but that protocol still has effect. Q488 Chair: There is no action. We have established that. Mr Inglese, can I read to you again the Erskine May reference? We have established there are no civil proceedings, but where a decision is in question that is what we are dealing with this afternoon or in the opinion of the Chair a case concerns issues of national importance I think this does, because many, many millions of taxpayers money are involved in those cases, reference to the issues or the case may be made in motions, debates or questions. I put it to you that, as a civil servant answerable to the Crown, you have to abide by the rules of Erskine May. Anthony Inglese: I am accountable in this respect to my department and to Treasury Ministers. Q489 Chair: Actually, I do not think you are very accountable to Treasury Ministers, but you are accountable to Parliament, if I may say so. We see a lot of officials in front of this Committee. In fact, we do not even bother with Ministers; we just see officials, and they you are accountable to Parliament. Anthony Inglese: If I may say, I have prepared as much as I can for this session. There are some things which I Q490 Chair: No, you have to answer the questions, Mr Inglese. This is not a Committee that takes statements. We want answers to questions just directly, simply. I think it is beholden on you to answer our questions directly and fully, under Erskine May and as a civil servant. Anthony Inglese: I do not have a statement, but I think it would be helpful if the Committee could understand the Q491 Chair: No. I put it to you that you should be accepting Erskine May. Let me just me ask you another question. James Eadie, who I understand is the first Treasury counsel, advised advice that was considered at HMRC in 2009 that as PAC are a parliamentary body with an oversight role over HMRC it follows that HMRC s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure. Do you agree with that statement? Do you agree with what Mr James Eadie said? Anthony Inglese: The legal advice is contained Q492 Chair: Do you agree with what Mr James Eadie said? Anthony Inglese: You have to see the legal advice in context, and the legal advice is Q493 Chair: Do you agree with what he said? Shall I quote it to you again: as PAC are a parliamentary body with an oversight role over HMRC it follows that HMRC s functions would extend to assist PAC

65 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 41 7 November 2011 HMRC and Cabinet Office with that oversight role. So there is no absolute bar on disclosure? Was Mr Eadie right or not right? Anthony Inglese: The current legal advice that we have 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 of writing Mr Hartnett has written to you on 19 October. Q495 Chair: Mr Inglese, was Mr Eadie right? Do you 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 on 19 October Q496 Chair: Mr Inglese, do you agree with him or not? Anthony Inglese: And Mr Eadie has agreed with that letter. Q497 Chair: Do you agree with Mr Eadie s advice? Do you agree? Anthony Inglese: All the advice on this subject has to 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. He said, as PAC are a parliamentary body that is what we are with an oversight role over HMRC you, as a civil servant, in the HMRC it follows that HMRC s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure. Do you agree with that? It is a very simple question. Anthony Inglese: What Mr Eadie has said is that HMRC this is in the letter of 19 October Q499 Chair: I picked out that bit of advice, because it is the key bit of advice that you got from Mr Eadie that will influence the content of this hearing, and it would just make our life one heck of a lot simpler if you could decide whether or not you agreed with it. Anthony Inglese: The letter Q500 Chair: Do you agree with it, Mr Inglese? Why are you finding it difficult to answer the question? Anthony Inglese: Because what you have done is refer to a part of an opinion that was written in 2009, whereas Q501 Chair: It is a pretty basic part. It is a key element in the status of you and your department in relation to us and our Committee. It is a key bit, which is why I have picked it out. It is the key element. Do you agree? Anthony Inglese: This is an opinion of There is an up to date piece of advice, which the department has communicated. Q502 Chair: So was Mr Eadie wrong in 2009? Anthony Inglese: The department has communicated Q503 Chair: Was he right or wrong? Anthony Inglese: I do not think it helps to go in that direction. Q504 Chair: Why? Anthony Inglese: Because the up to date advice is in the 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 much simpler 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. Both the reference to our proceedings within Parliament and the reference to the advice from Treasury counsel will then give us a context in which we can get clarity in the questions you ask us. That is all. Just give me a yes or no. Anthony Inglese: Well the answer is that the words you have used are a partial quotation that you cannot draw a wider conclusion from. Q507 Chair: No. What it says is that you have a duty to Parliament. Do you? Do you have a duty to Parliament? Anthony Inglese: The letter of 19 October says Q508 Chair: These are such simple questions. Do you 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 bar on giving evidence to us about individual cases where they have national importance? Is there an absolute bar? Anthony Inglese: That is what the letter of 19 October says. HMRC has consistently taken the view that it is lawful to pass non-identifying information to Select Committees through the gateway that we have. However, it does not follow from this that it is necessarily properly part of HMRC s functions to provide disclosure of taxpayer-specific information to a Select Committee. Q510 Chair: Are you now saying that, as I take it, James Eadie was wrong? I just want that for the record. Anthony Inglese: No. I am saying that you have taken the James Eadie sentence out of context. Chair: I have not taken it out of context. I have taken it as the key way in which he wanted to distinguish I do want to get on to the content, because we want to answer questions on the actual content of this case. If you are going to evade them, I think you will end up with an exceedingly cross Select Committee, but let us see. Q511 Stephen Barclay: If I am hearing correctly, Mr Inglese, you have accepted two points that HMRC owes a duty to Parliament and to the Public Accounts Committee. Is that correct?

66 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 42 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Anthony Inglese: I have said Stephen Barclay: You have just said it. Anthony Inglese: I have said that it is part of our functions properly to assist Parliament, and we have taken 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 so this is not a trick question that HMRC recognises that it is part of its functions properly to assist Parliament, so can we just please stick to the questions? I thought that you had already accepted this point. Can we just go again? Do you accept that HMRC owes a duty to assist Parliament and the Public Accounts Committee? Yes or no? Anthony Inglese: Yes. Q513 Stephen Barclay: Good. Do you therefore accept that information can be provided that is nonidentifying? Anthony Inglese: Yes. Q514 Stephen Barclay: I thought that those were the two points that we had got to with the Chair. Where does the legislation draw a distinction between identifying and non-identifying information? Anthony Inglese: Because the legislation looks at each disclosure Q515 Stephen Barclay: But can you refer to the legislation? Where in the legislation is a distinction drawn between identifying and non-identifying? Can you tell me which section that is? Anthony Inglese: That is the context of the legislation, so if you look in sections 18 and 19 Stephen Barclay: No, it is not. There is no distinction. Anthony Inglese: That is the advice that we believe is right, and that we have confirmed with the first Treasury counsel. That is our legal advice, and it is the advice that we act on. Q516 Stephen Barclay: Can I come back to the question? There is no distinction drawn. Can you take me to the section that draws a distinction between identifying and non-identifying information? Anthony Inglese: It stems from the notion of what one is disclosing, so one has to look at each disclosure; that is the point of the 2011 letter. Q517 Stephen Barclay: No, the 2011 letter lists five policy reasons, Mr Inglese, which I will come to, and which we can go through. Chief among them is that of it having an effect on voluntary compliance, but the Act, on my reading, does not draw a distinction between identifying and non-identifying information. The department is calling for five policy reasons, which we can come on to, but in law there is no distinction, is there? Anthony Inglese: In law, one has to look at the specific piece of information that is being disclosed. Q518 Stephen Barclay: There is no statutory justification for the distinction, is there? There are perfectly reasonable policy reasons why you may want to take a decision not to disclose, and we can come on to those. The letter from Mr Hartnett sets out five policy reasons, but there is no statutory justification for distinguishing between identifying and non-identifying, is there? Anthony Inglese: The sentence that I read out is the sentence that says that we look at each specific piece of information when it is being disclosed. Q519 Stephen Barclay: I am asking for the law. Can you take me to where in statute it defines a distinction between the two? Anthony Inglese: The best answer that I can give, I think, is that one has to read the whole of this letter to get the context right. Q520 Stephen Barclay: With respect, the letter is not the law. The letter sets out a range of factors that are policy considerations. What I am asking you is where in statute it says that. What we have here is a door; the door says that where there is a gateway, which is if you have a duty to assist Parliament, you can provide information. In the case of this Committee, the gateway is open. In statute, there is no distinction between those two things. Referring to the letter is a totally different issue to what is in statute. Do you accept that in statute no distinction is drawn? As I understand it, you are general counsel for HMRC. Anthony Inglese: Yes, I am general counsel. Q521 Stephen Barclay: As general counsel of the department, do you accept that in statute there is no distinction between identifying and non-identifying information? Yes or no? Anthony Inglese: Looking at the context of the legislation, there is a distinction. Q522 Stephen Barclay: Can you take me to the distinction? Anthony Inglese: I can take you to it, if you would like, 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 of the letter Chair: We are not interested in the letter; we are looking at the Act. Mr Bacon: It would be quicker if you went to the Act. That is the actual legislation. Anthony Inglese: In order to read the legislation sections 18 and 19 one has to look at the legislation as a whole, and then one takes one s meaning from the words used in the legislation and the purpose and the context. That is how legislation is interpreted. Q523 Stephen Barclay: There is nowhere in law where it distinguishes between those two things, is there? It is policy consideration, and we can come on to that, but in statute you are not prevented from disclosing. Anthony Inglese: No, it is more than policy. Q524 Stephen Barclay: Where? You are a lawyer. Anthony Inglese: If you have the patience, I must refer you to parts of the letter, which are very clear.

67 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 43 7 November 2011 HMRC and Cabinet Office Q525 Chair: Honestly, Mr Inglese, with the greatest respect, the letter reflects the current policy of HMRC, with which we as a Committee have a problem. You are trying to hide a policy behind an imperative of legislation. If you can demonstrate to us that the imperative of legislation is genuine, you may find a different response from the Committee. It is no good going back to the letter, because the letter is your policy. What my members are drawing to your attention is the legislation. Again, it is a simple question. You seem to find it really difficult to answer these simple questions. Is there something in the legislation that tells you that you cannot reveal details of a particular taxpayer, or is it policy? Anthony Inglese: It is more than policy; it is what the legislation means. There are two levels to this. The first level is whether the legislation allows us to pass over indentifying information whether we are permitted to do that. To get there, one has to look at the duty of confidentiality under section 18 and the criminal offence under section 19. I am sorry if the letter acts as a red rag to a bull, but that is Chair: This is the third question you have failed to answer. Just to make it clear: you failed to come back on Erskine May ; you have failed to answer whether or not you agree with what seemed to me to be at the heart of the advice that you got from James Eadie as first Treasury counsel; and you are now failing to answer whether there is a constraint on you in legislation. You must recognise, as a lawyer, that that is a pretty poor show so far, and we are only 20 or 25 minutes in. We are happy to stay all night. Anthony Inglese: I am sorry if that is the impression that I am giving. I thought we were just about to start an interesting discussion between two lawyers about what 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, that there are lots of circumstances in which disclosure is possible. That is plain on the face of the Act. Basically, section 18, which you have referred to a couple of times, says in subsection (1): Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs. Subsection (2) then states: But subsection (1) does not apply to a disclosure, and it lists paragraphs (a), (b), (c), (d), (e), (f), (g) and (h) as exemptions to the rule that information may not be disclosed. So there are lots and lots of cases just under section 18 in which one can disclose information. The Act goes on to say in section 20 that Disclosure is in accordance with section 20 if and it then gives a whole load of possible examples, one of which is disclosure to a person exercising public functions. Lots of things are plain on the face of the Act, with regard to why disclosure may, in certain circumstances, be allowable. Mr Barclay has been pursuing you for seven or eight minutes, perhaps longer, on the simple question of where the statute draws a distinction between I think you said, Mr Barclay identifying and nonidentifying, and you have failed to answer him. You have answered a different question, which he did not ask, which leads me to believe, although I am not certain of this, that the correct answer to Mr Barclay s question is that there is nowhere in the statute that draws a distinction between identifying and nonidentifying. Is it correct that nowhere is a distinction drawn? I do not know why you are getting all these notes from people behind you; you are supposed to be the general counsel for HMRC. You are the top dog in the legal area; in so far as one has legal dogs, you are the top one, so why you have these people woofing behind you I am not clear. You are the one who should be advising them, frankly. Is what Mr Barclay was pursuing correct? Is there no statutory definition that distinguishes between non-identifying and identifying? Is that correct? Anthony Inglese: This legislation, as with all legislation, takes its meaning from the purpose and the context. Words such as disclosure and functions take their meaning from the context, and part of the context is the criminal offence under section 19. The letter Stephen Barclay: Parliamentary privilege applies, the Bill of Rights would apply, in terms of criminal offence, but in any event we have not gone into the detail with Vodafone that is information in the public domain. That gets us into the issue of policy decision. Even the letter from Mr Hartnett accepts the fact. He says, Where there is a power to disclose, which is obviously different from the position taken by Sir Gus O Donnell letter to Edward Leigh, in which he said that we cannot disclose, much as we would like to do so. Mr Hartnett is saying, Where there is a power to disclose, a decision whether or not to disclose must be taken in respect of each identifiable piece of information. So there is an acceptance in this letter which, indeed, talks about the need to reach (in summary) a reasonable decision. The point is that in law you re not prevented from disclosing, but the department is taking a decision, which it is perfectly entitled to take, at its own discretion as to whether it discloses. We then need to establish whether that decision is being exercised reasonably or not. The point is that you are not prevented in law from disclosing. Anthony Inglese: As I was saying earlier, there are two levels. First, is it part of our function to disclose identifying information? The letter says that it does not follow that it is properly part of our function, and the question about whether it would be the case is far from free of doubt. Because of the potentially criminal context in which the question arises, it is entirely appropriate for the Commissioners to take the view that they do not want to have that doubt. Stephen Barclay: You are saying that criminal sanctions apply. We are talking about passing information to Parliament, so parliamentary privilege would apply. Anthony Inglese: It is also necessary to look at the other provisions of the Act that, for example Q527 Stephen Barclay: You have gone off on to another point. Your point was that criminal sanctions apply. Surely this would be covered by privilege?

68 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 44 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Anthony Inglese: No, it is important to look at the other provisions because, for example, we comply fully 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 different issue. You have no choice over that; the NAO has the right to demand whatever information it needs. We covered that last time and it is absolutely irrelevant as to how you exercise your discretion. You have no discretion in terms of the NAO. The NAO, by law, can ask for whatever information it requires. Anthony Inglese: I haven t commented on the second level yet. At the first level, it is entirely proper for the Commissioners to take the view that this isn t a function because of the advice Q528 Chair: What isn t a function? Anthony Inglese: That it is not a function to give identifying information. As the letter says, it is far from free Q529 Chair: Ever? Anthony Inglese: I think that one would have to find a highly exceptional case Q530 Chair: Well, in the minutes that we are going to come back to in a minute, you said that particulars of the claim in the county court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. Is that true? Anthony Inglese: I don t Q531 Chair: Is that true? Anthony Inglese: I am not going to comment on the contents of that document. Q532 Chair: Is that true, Mr Inglese? Is it a fact or not a fact? You are not asked for a comment. Is that true? I will read it again. You are said to have said that the particulars of claim in the county court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. Is that true? Are there public documents in the county court that could be copied by anyone interested in comparing the settlement sum with the claim? Is that true? Anthony Inglese: I m afraid I cannot comment on the content. Chair: Why can t you? It is completely ridiculous. This is just an issue of fact. Can you say whether that is true or not true? Anthony Inglese: I can say at a general level that if there is litigation in the county court, the documents will be available. Stephen Barclay: It is here. I ve got a comment on the Goldman Sachs case. It is interesting we may come on to why you issue proceedings in the county court, which tends to get less reported than the High Court, given the value of the sum. The documents are here; they are a matter of public record, as are the data in the Vodafone accounts that show the amounts of assets it has. It is a policy issue about where you are, and there are various policy points concerning the impact on voluntary compliance or the issue about the prosecution of officials. Those are policy questions. I am very happy to spell out why I don t think they apply, but we have not addressed the starting point, which is the legal decision. Anthony Inglese: If I come on to that level, an issue set out in the letter says that if it were the case that a function existed, that power would still have to be made in a way that was consistent with both public law principles and the department s statutory obligations. Q533 Chair: Right, Mr Inglese, we are taking a very unusual step this afternoon. From here onwards, we are going to examine you on Oath that is a power that we have. The Oath will be administered by the Clerk. I gather there are two forms of words that you can 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 a minute s time out at all. This Committee has the power to make witnesses give evidence under Oath, and we are doing so because we have not been able to get answers otherwise, so I think we should just get on with it. Anthony Inglese: I swear by almighty God that the evidence I shall give before this Committee shall be the truth, the whole truth and nothing but the truth, so help me God. Q534 Chair: Thank you. I am no lawyer, but clearly, as you have taken the Oath, you will not want to give answers that are incorrect, because you might find yourself with an accusation of having committed perjury, as I understand it. May we now return to the minutes of the meeting on the 8 December 2010 in your office, and can you confirm whether they are correct? Anthony Inglese: I cannot comment on the contents of the document, but it was prepared as an aidemémoire by two of my litigating lawyers after a meeting that I held. The note was not cleared with me. You have heard my general reasons for not commenting on the note itself, but if it helps the Committee, I will tell you why I had the meeting and what I was trying to achieve, so that you can understand the context. Q535 Chair: There are a number of bits that really interest the Committee, but we will look at the final sentence of that minute, which says, AI you said he would always want to assist DH, Mr Hartnett but not if this were unconscionable. He you referred to the difficulty all those present at this meeting were having in justifying a settlement without an interest element. Is that correct? Did you consider the settlement in that light? Was that a correct reflection of your view of the settlement? Anthony Inglese: At that meeting, I was trying to understand what had happened. Mr Hartnett asked me for advice. He said, A mistake has been made, will you advise me on what Q536 Chair: He did not tell you then that a mistake had been made; as I understand the chronology, it was after you had the meeting. Did you, at that time, in that meeting, consider even taking out the

69 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 45 7 November 2011 HMRC and Cabinet Office unconscionable the difficultly all those present at the meeting were having in justifying a settlement without an interest element? Is that correct? Was that your view? Anthony Inglese: Having sworn the Oath, I do need time to tell you the context, which is that I was trying to understand what had happened. I did not know anything about the Q537 Chair: You are trying to evade the question again, Mr Inglese. It is quite simple: was that your view or not? It is a very simple question. Giving me context is a way which I hate in this Committee of evading an answer. Anthony Inglese: I am not evading the answer, but you do not often get advisory lawyers coming to talk to you, and it is important that I have an opportunity to explain what I was trying to do at that meeting. I was trying to gather information about what had happened. 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 go was being de facto settled. So I had to speak to my litigation lawyers, who were handling the litigation, to ask, What s it all about? What s going on? What do you know? What are the issues?, so that I could try to understand what the mistake was. Q538 Chair: You keep referring to a mistake. At that point, nobody admitted to a mistake. At that point, did you think that the settlement was unconscionable? Anthony Inglese: No, I don t even believe that I used the 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 to justify a settlement without an interest element? Anthony Inglese: I think that the juxtaposition of those things in that paragraph produces an unfortunate interpretation that I believe is not the case. Q540 Chair: You have a wonderful memory of everything except for using the word unconscionable. Is that right? Anthony Inglese: No, what I believe that that sentence is getting at is that one of the things at which we looked at the meeting was to see whether a mistake had actually been made. Sometimes, people say they have made a mistake, but then, when you think it through, you find that, actually, they had it right all along. We talked it round, looked at what was going on, 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? Did you advise him that the settlement reached was binding or not binding? Anthony Inglese: As Mr Hartnett has explained to this Committee, I advised him on what the options were. Q542 Chair: Did you advise him that it was binding? You are being so evasive. Was it a binding agreement or not a binding agreement? Anthony Inglese: I am not being evasive. Ian Swales: Mr Hartnett has already asserted the point. Anthony Inglese: If I may say so, Chair, you have put the question in a binary way. I advised that it was open to the department to go back and revisit the settlement, or that it was open to the department to carry on and accept the mistake. Q543 Ian Swales: Does that mean non-binding, to a non-lawyer like me? That sounds like what you are saying. Anthony Inglese: No, that is not a word I am using. Q544 Mr Bacon: It was a word that Mr Hartnett used that is the point. He said that the legal advice one takes it that he was referring to the advice from the general counsel s office and from you was that the agreement could be unwound, or that you could choose to be bound by it. Mr Barclay said at the time, in question 37, you accept that legally you were not bound by that decision. Legally you could have rectified it. Mr Hartnett replied, I received advice that we could regard ourselves as bound by it, or not bound by it. Does that refer to your legal advice? Anthony Inglese: It was my personal advice. Q545 Mr Bacon: Let me clarify that that sentence that I just read out was your advice. Anthony Inglese: My personal advice was that they could bring back and reopen the settlement, or we could go on and leave things as they were. Those were the two options. Q546 Mr Bacon: Indeed you could let the thing lie. The words that Mr Hartnett chose to use were, I received advice that we could regard ourselves as bound by it, or not bound by it. Mr Barclay said, In other words, you were not bound by it. Is it not correct to say, following what Mr Swales asked a moment ago, that your advice was that HMRC was not bound to stick to the agreement? That is correct, isn t it? Anthony Inglese: I have said previously that this is the subject of a judicial review that will put the spotlight Q547 Mr Bacon: First, we have established that there are no proceedings we established that earlier. I am just asking you about Mr Hartnett s evidence last time, and you have already agreed that you were one of the people who gave this advice. When we see Mr Hartnett saying, I received advice that we could regard ourselves as bound by it, or not bound by it, was Mr Barclay correct when he responded, In other words, you were not bound by it? In other words, my question is whether it is correct to say that the advice was that the agreement was not binding yes or no? Anthony Inglese: And my advice was that we could go back and reopen. Chair: Your advice was to go back and reopen the negotiations. Anthony Inglese: Or that we could

70 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 46 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Q548 Mr Bacon: Good, that s clear your advice was that you could reopen it. Once again, we can, I hope, get to the question that I asked. Was it correct to say that your advice was that the agreement was not binding yes or no? I do not know why you have this reluctance to answer a question when the answer seems obvious to everyone else. Anthony Inglese: I am doing my absolute best, within my constraints of legal privilege, to give you the headline of my advice. The headline was that we could go back and reopen. Mr Bacon: Thank you. Anthony Inglese: Or that we could leave things and not reopen. Q549 Fiona Mactaggart: I m interested in this. I wasn t at the earlier sessions, but this sounds to me as though this advice was given by you after Mr Hartnett thought he had concluded a deal, but you said earlier that this was part of your litigation strategy. Would it not have been normal for him to have asked you for advice before he went out to agree a deal, and if he did not, why not? Anthony Inglese: The answer to the very first question about the litigation and settlement strategy is that this was a mistake Q550 Fiona Mactaggart: What was a mistake? Anthony Inglese: I was giving advice on the basis that a settlement had been made, and a settlement under the litigation and settlement strategy is a good thing if settled appropriately. If a mistake is made, the advice that I was giving was on the mistake, so the answer to the second part related to whether, because there was litigation going on, the team should have consulted the litigating lawyers. The answer to that question 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 it was a mistake, the litigation strategy was not properly followed in this particular instance. Anthony Inglese: That is because it was a mistake. Chair: It doesn t matter why. I accept that you say it was a mistake, but the litigation strategy as set out in HMRC was not properly followed in this instance. Anthony Inglese: I am sure the team was doing its absolute best in good faith to follow the strategy, but it made a mistake. Q553 Chair: Can I ask you a question? If you give clear advice, and it s not heeded, who do you go to? Anthony Inglese: The first port of call, if it s not heeded, is that I would go to the person I gave it to. Chair: Yes, of course. They re the ones who don t heed it. Go on. Anthony Inglese: I m sorry. I probably don t need to say this to you, Madam Chair, with your experience of Ministers and so on, but you go to the person you have advised, and say, Is something not clear about the advice? What are you doing with it? I m not drawing myself up to my full height, but in my very long experience of working in many Government Departments that usually does the trick, because we are working under a rule-of-law culture and people want in their hearts to follow the rule of law, even if sometimes it irritates them immensely, and they want to question the legal advice. Sometimes the legal advice needs to be questioned, so you go back to the person and you say, Is the advice not clear? Has it not hit the target? Is there something you don t like about it? What should we do about it? You sit down and you talk it through with people. That usually does the trick. Q554 Chair: And then? If it doesn t do the trick, who do you go to? In this instance, your advice was you have permission for overturning the deal on which there was a handshake. In this instance, they didn t listen to your advice that they could return to it. Who would you go to beyond Mr Hartnett? Anthony Inglese: My advice was listened to in this case. I said, You can go back, or you cannot go back. So my advice was listened to. Q555 Chair: I see, so you cover yourself by not giving clear advice. You can do, yes or no, and everything s all right. That s not very strong advice. Q556 Fiona Mactaggart: How does that comply with the litigation and settlement strategy, which in strong cases and in view of the fact that the other cases, which were on all fours with this one, did concede says, Settle for the full amount HMRC believes the tribunal and courts would determine or otherwise litigate. How does it comply with that? Anthony Inglese: In this particular case, the aim was to settle the case appropriately and a mistake was made. It was a mistake. Amyas Morse: I think you sort of slipped on a point there. I think I heard you say that normally the advice would be taken before a settlement was made and the advice was not taken before the settlement was made. You then gave advice about mitigating the mistake that resulted from the settlement being made. Is that right? Anthony Inglese: Yes. Q557 Stephen Barclay: On the chronology, can we clarify what date you became aware that a mistake had been made? Anthony Inglese: 7 December. Q558 Stephen Barclay: So when Mr Hartnett shook or did not shake hands with Goldmans two days afterwards sorry, it was three days, because it was the weekend: he had the meeting on the Friday and he said he spotted the mistake on a Monday he did not get in touch with you at that point? Anthony Inglese: I believe he got in touch with me as soon as he was able to. I do not think anything turns on that. Q559 Stephen Barclay: The chronology is interesting, because I have always found it odd whether the mistake was spotted before or after the meeting on 30 November. Can we go through the chronology? The meeting was held on 19

71 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 47 7 November 2011 HMRC and Cabinet Office November actually, why don t you take us through the chronology? The meeting with Goldman Sachs and Mr Hartnett was on what date? Anthony Inglese: I believe it was 19 November. Q560 Stephen Barclay: So the deal was done on 19 November, yet you did not learn of the mistake until 7 December, yet you are the chief lawyer advising on whether this is a binding or non-binding deal. Can you talk us through what happened after 19 November? Who first brought it to your attention? When did you first learn of a mistake having been made? Anthony Inglese: 7 December. Q561 Stephen Barclay: Okay. Who brought that to you? Was it Mr Hartnett or one of your lawyers? Anthony Inglese: Mr Hartnett. Stephen Barclay: So Q562 Mr Bacon: So thank you, Mr Barclay, this is totally relevant when Mr Hartnett said in answer to question 33, which asked when he spoke to Mr Inglese, he said: I think on the Monday that is, Monday the 22nd, after Friday the 19th that was wrong, wasn t it? Anthony Inglese: There was a point between I cannot remember the dates at that point the settlement and 7 December where Mr Hartnett spoke to me. Q563 Mr Bacon: Yes, but we are talking about Monday the 22nd. The meeting occurred on Friday the 19th. Mr Hartnett said, in response to my question asking him when he spoke to Mr Inglese: I think on the Monday, but I need to check, Mr Bacon. I m sorry. I asked him: You think it was the 22nd, after the Friday. He said: Very soon after, yes. Well, actually, we are talking about a couple of weeks, some 15 days after. If you did not find out until 7 December, that is a couple of weeks. I know that Mr Hartnett was travelling we established that he was abroad most of that week but there are telephones. You are telling us 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 you immediately convened a meeting, which took place on 8 December. That is right, is it not? Anthony Inglese: On 7 December, I started to gather information. I convened meetings on 7 and 8 December. There is one other thing. I heard about the case from Mr Hartnett before 7 December. In that conversation he said to me: One of the cases that you are litigating has just settled. At the time, I did not think any more of it. Q565 Stephen Barclay: Did he tell you what case it was? Anthony Inglese: He might have done, but I am not trying to be funny we have 8,000 cases, and if I do not need to know, I do not ask. Q566 Stephen Barclay: Can you clarify whether, ahead of today s hearing, you read the minutes of the 30 November meeting? Anthony Inglese: Which meeting was that? Stephen Barclay: That was the high-risk group meeting that was held on that date. Anthony Inglese: I think I read them, but I don t have them in front of me. Q567 Stephen Barclay: I presume that there is a detailed minute of that meeting. Anthony Inglese: I cannot recall that. I do not have it in front of me. Q568 Stephen Barclay: Well, it s difficult to read it if it doesn t exist, but one would assume a meeting of that gravity would have minutes taken. Do those meetings usually have minutes taken? Anthony Inglese: Yes. Q569 Stephen Barclay: But you haven t read them prior to coming today? Anthony Inglese: I have read them, but I don t have them in front of me now. Q570 Stephen Barclay: So they do exist. Was any of your team at that meeting? Anthony Inglese: Yes. Q571 Stephen Barclay: Did any discussion take place around the Goldman Sachs deal at that meeting? Anthony Inglese: Yes. Q572 Stephen Barclay: Was the mistake spotted or discussed at that meeting on 30 November? Anthony Inglese: I believe so. Q573 Stephen Barclay: So at the meeting on 30 November, the mistake had been identified then, more than a week before Mr Hartnett telephoned you? Anthony Inglese: Mr Hartnett spoke to me on 7 December. Q574 Stephen Barclay: Sure. Did no one from your team communicate that a mistake had been made, on something of this gravity, between 30 November and 7 December? Anthony Inglese: Did anyone from my team tell me? Stephen Barclay: Yes. Anthony Inglese: No. Q575 Stephen Barclay: So your team your lawyers went to a meeting where they established that a serious mistake had been made, but they didn t tell you, as general counsel? Anthony Inglese: My lawyers are appropriately senior and 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 this is 8 million to 10 million of taxpayers money gone missing. 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 at the mistake and working out what to do

72 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 48 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Q578 Chair: Yes, Mr Inglese, but you agree with the Committee s view that whatever the sum is, 8 million to 10 million is a lot of money? Anthony Inglese: Of course it is. Chair: Right. It is serious. I would have expected someone on my team, had I been their boss, to tell me. Q579 Stephen Barclay: In terms of the discretion given to your team we have been focusing on Goldmans, whereas the bigger-value item was the Vodafone settlement and the mystery as to how the figure of 1.25 billion was arrived at did your team provide legal advice on whether 1.25 billion was the correct 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 whether that was the correct amount of tax due? Anthony Inglese: As Mr Hartnett is saying, lawyers were involved throughout, at different stages of that. Q580 Stephen Barclay: Sure. I appreciate that lawyers were involved I would assume that lawyers drew up the contract, so it is a statement of the obvious, to an extent, to say that lawyers were involved. What I am saying is that you alluded to, in terms of your answer to the Goldmans meeting, the fact that you have senior lawyers to whom you give discretion as a result of their expertise. Are you a tax expert yourself? Anthony Inglese: I am not what you call a tax lawyer. Q581 Stephen Barclay: And the three lawyers you hired the three people beneath you are they tax experts? Anthony Inglese: The three directors whom I have, who have come to work for HMRC under fair and proper procedures rather than people whom I ve hired are not what you would call tax experts. Q582 Stephen Barclay: I am sure that it was fair and proper; I wasn t suggesting otherwise. We discovered at the last hearing that there is only one tax Commissioner who actually has detailed knowledge of tax. What you are saying is that out of general counsel and the three senior lawyers hired, none of them are tax experts. Coming back to the Vodafone settlement at 1.25 billion, it may be perfectly logical therefore, if you are not a tax expert, for you to give senior lawyers within your area a degree of discretion. What I am trying to establish is whether they advised, with their expertise, that 1.25 billion was the correct amount. Anthony Inglese: My answer to that is as before: I can confirm that lawyers were involved throughout, but I cannot go into any more detail. Q583 Stephen Barclay: Okay. I think the quantum is much more important than Goldman Sachs. Between 2001 and 2011, as far as Vodafone is concerned, we are looking at in the region of 25 billion in profits. The settlement the 30%; obviously, it came down in the latter years seems strange on a number of levels. First, it includes the 2011 and 2012 profit, but given that the settlement was reached in 2010, 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 about 20% of Vodafone s profits. That means the Exchequer may have lost around 8 billion in tax, which makes Goldmans look paltry in comparison. The reason why I am saying that is that potentially we cannot get the figures, because Mr Hartnett will not answer the questions we are looking at 8 billion of tax lost, a company that was given five years to pay even though it was sitting on a cash pile and a settlement based on future profits that were unknown, even though the department does not allow such considerations to be given and the legislation had not been passed by Parliament, so the department could not have given undertakings. I am trying to establish, Mr Inglese although you and your deputies might not be tax experts who among your lawyers was advising Mr Hartnett, so that we can satisfy ourselves that the 1.25 billion was correct. Anthony Inglese: I am afraid I cannot comment on that. Q584 Stephen Barclay: Why not? Anthony Inglese: Because that is covered by legal privilege, and I cannot comment. I would like to say something about the fact that you keep mentioning tax expertise. Can I do my job without being a tax lawyer? Of course I can. Q585 Fiona Mactaggart: Can you do it well without being a tax lawyer? Anthony Inglese: Yes, I can, because I have lots of tax lawyers who know a lot about the technicalities. Q586 Stephen Barclay: But we don t know what involvement they had. That is the issue. We don t even know if interest was charged on the 1.25 billion. One assumes it was not, because Vodafone released 900 million that they had set aside. They stopped setting money provision aside in 2006, incidentally, probably assuming that they were going to win the case, and then found that they did not. They would have had to set aside far more, had they known they were going to lose the case. But we do not even know what interest the 1.25 billion included. Are you able to tell us? Anthony Inglese: I cannot comment on any of that. Q587 Stephen Barclay: But who were the experts from your department that were providing the tax legal advice to Mr Hartnett? Anthony Inglese: All I can say is that lawyers were involved throughout. That is all I can say. Q588 Chair: But not in-house lawyers. You sought advice from paid lawyers outside the service more consultants? Anthony Inglese: Again, I cannot comment on specific cases, but where necessary obviously, where there is litigation, we always involve counsel. Q589 Chair: You said how many cases of litigation? Anthony Inglese: We have 8,000 cases on the books at the moment. Where there is litigation, obviously,

73 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 49 7 November 2011 HMRC and Cabinet Office counsel approved by the Attorney-General is always involved. Sometimes, in cases where we want special advice from a silk or a skilled counsel, we bring in external counsel through the solicitor s office. Q590- James Wharton: Mr Inglese, I have listened very carefully to the evidence you have just given to Mr Barclay. I apologise, as I am sure this is a matter of my failing to interpret the discussion properly rather than of an evasive answer on your part. Can I take you back a couple of steps to the gap between when your lawyers became aware of the issue and you became aware? Mr Barclay asked you if your lawyers had told you, and you started to explain that the people who work for you are sufficiently senior to make decisions, operate and so on. I may have missed it, but I do not think you actually gave a direct answer, a yes or no, to the question whether they told you or not. Anthony Inglese: I think I said no. Q591 James Wharton: Sorry. It is my fault if that is the 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 looked at, apart from the fact that we often cannot discuss what is in notes and cannot get the information we need as a Committee properly to assess what has gone on, on the basis of documents that we none the less have, can you tell me whether proper records of Mr Hartnett s meetings with big companies are now being kept, and whether, on your advice, there have been any changes in procedure so that proper and verifiable records are kept in future? Anthony Inglese: That s really more of a question for him, but I expect he ll say yes when you ask him. Q592 James Wharton: Allow me to rephrase it. Has there been a discussion about the quality of record keeping on which your advice has been sought which may change the procedure, so that when we next ask him, we know what, if any, your involvement has been? Anthony Inglese: We have had a discussion about whether, in the previous case we were talking about, lawyers should be consulted before a settlement, so that the submission for Mr Hartnett on the settlement would include the views of the litigating lawyers and the record would have Q593 James Wharton: And have you had a discussion on the sorts of records that should be kept of 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 factual questions. I m not a lawyer, although I admire your ability at fencing. It s better than the Austrian Archduke before the collapse of the empire. It was agreed in a previous session that Goldman Sachs was warned that if it persisted in resisting, which it did, it would be liable for interest. It resisted for five or six years. Did that warning come from you, or was it just a routine thing passed on as a threatening gesture by HMRC? Anthony Inglese: That was in the litigation that was being brought. Q595 Austin Mitchell: Right, but you were consulted in the issue of that warning? Anthony Inglese: I wasn t in HMRC at the time. That was Q596 Austin Mitchell: Okay, but it would take advice 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 any case. Wouldn t it be normal practice to do that? It wasn t a one-off decision that Mr Mitchell is referring to. Isn t it normal practice in litigation of that nature to charge interest? Anthony Inglese: It depends. If I can come away from that case, it depends on whether it is appropriate and the litigation settlement strategy says that we would normally charge interest where there is a crystallised sum of tax due. Q598 Austin Mitchell: Okay. We now come to the meeting in December. Mr Hartnett told us in the examination on 12 October that he had consulted you: There were a number of issues to be taken into account. Mr Inglese said to me that there were two entirely acceptable approaches in law we ve agreed that one was to stay with the proposed settlement and one was to put it to one side. You ve agreed that? Anthony Inglese: Yes. Q599 Austin Mitchell: Okay. Was that meeting minuted? Mr Hartnett didn t know. Anthony Inglese: The meeting with Mr Hartnett itself was not minuted. Q600 Austin Mitchell: Okay. Did you express any preference or offer any advice as to which of these two courses should be followed? Anthony Inglese: I gave the options what the options were. It was then very much for the Commissioners to decide, on the basis of the relevant facts, which was the preferred option. Q601 Chair: Lawyers usually give advice as well as options. Did you give advice? Anthony Inglese: I Chair: You are on oath. Anthony Inglese: I am on oath, and I did not give legal 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 was the preferable option? Anthony Inglese: I have no vote in these matters. Mr Bacon: I understand

74 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 50 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Q605 Austin Mitchell: But your preference was for Anthony Inglese: But my preference was for not going back. Q606Chair: Not going back? Anthony Inglese: Not going back. Q607 Mr Bacon: Even though the litigation strategy is clear that in the right kinds of case, it would be normal to charge interest? Anthony Inglese: Because a mistake had been made and the question then was, having made a mistake this is not the most uncommon of questions all over Government organisations all the time we have to find a way of coming up with the best solution that doesn t make things worse. Q608 Chair: Is it true, Mr Inglese, that in July 2010 you received advice from Malcolm Gammie that the Government s position was strong and that you could be confident about getting all the money owed to the taxpayer, including interest? Anthony Inglese: All I can say is: a mistake was made. Q609 Chair: Is that true that you got that advice? Anthony Inglese: I m honestly not sure if I can say what advice we got because Chair: Well, it s in the public domain, so you might as well say whether it s true. Anthony Inglese: The thing I can say is: we were carrying 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 April 2010 there was a judgment in the British Virgin Islands in which the judge dismissed a claim that the employer of the bankers Goldman Sachs was in the Virgin Islands? Anthony Inglese: I would have to write to you about that. Q611 Chair: Why? Because you can t remember? I can t believe that in preparing for this hearing this afternoon, 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, but I 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 you know the answer. What do you think? Anthony Inglese: I would prefer to be allowed to write 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 the answer is? Anthony Inglese: When the question is put like that, I am just not sure. So instead of being po-faced and saying, I really don t know, I think I might know but I do need the opportunity to write. Mr Bacon: Well, we need the opportunity to get the answers, 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 asked you before? Is it true that the particulars of claims in the county court are public documents and could be copied by anyone interested in comparing the settlement sum with the claim? Anthony Inglese: Is that the same as the question you were asking before? Chair: I m asking it now, when you are on oath. Anthony Inglese: I believe from what I have heard from my litigating lawyers that that is indeed the case, that the public can see them. Q616 Chair: If that is the case, can you therefore tell us what the claim was and what the settlement sum 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 settlement was. Q618 Chair: Sorry, but to go back again, you have said it is true that these are public documents that could be copied by anyone interested in comparing the settlement sum with the claim. So if it is true that they are in the public domain, could you help the Committee by telling us what the claim was and what the settlement sum was? Anthony Inglese: If a figure is in the public domain I can help the Committee by writing to it with that figure, but I do not believe that the settlement figure is in the public domain. Chair: Well, it says, could be copied by anyone interested in comparing the settlement sum with the claim. Settlement sum with the claim those are the two figures I am asking for, and you said you could get them because they are in the public domain. Anthony Inglese: No. I can certainly write to the Committee about anything that is in the public domain through the county court. Q619 Chair: Can those people passing you endless notes 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, could you clarify whether with the settlement any discretion was exercised over the 1.25 billion, or was that the correct amount in law? Anthony Inglese: I m afraid I cannot go into that; I cannot comment on it. Q621 Stephen Barclay: I am just asking from a legal process point of view whether any discretion was exercised. Anthony Inglese: I can say at a general level that when a settlement is reached it is reached by agreement.

75 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 51 7 November 2011 HMRC and Cabinet Office Q622 Stephen Barclay: But Mr Hartnett said that no discretion was exercised: he did not take a penny less than the correct amount in tax. As a matter of law, I want your confirmation as to whether that is correct 1. Anthony Inglese: It is my understanding that it is correct. Q623 Stephen Barclay: So, no discretion over interest was exercised? Anthony Inglese: My understanding, from speaking to all my colleagues, is that the Vodafone settlement was correct. Q624 Fiona Mactaggart: We have learnt that you are a cautious lawyer from the way in which you have responded to us, and I am wondering what advice you gave to Mr Hartnett before he went to talk to Goldman Sachs, and whether you think he followed it. Anthony Inglese: I wasn t involved in the settlement at all. Q625 Fiona Mactaggart: That was not what I asked you. I asked you what advice you had given him before he went to talk to Goldman Sachs. Anthony Inglese: Sorry, I wasn t involved in the Goldman Sachs matter at all until I was asked for advice on the mistake. Q626 Fiona Mactaggart: He never asked you for advice in advance? Anthony Inglese: I personally was never asked for advice 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 in your answers to Mr Barclay about Vodafone was that you said that lawyers were involved throughout. One of the issues in relation to the Goldman Sachs negotiations was that lawyers were not involved. So it is no surprise to me to hear that you were not involved. I was just getting you to confirm that no lawyers were involved. In a recent evidence session, when I asked Mr Hartnett whether there was a legal error in thinking that you could not charge interest, he said, Yes. I then said, Whereas you actually could. That is to say, that you could charge interest. Then I asked him, In coming to the conclusion that you could not charge interest, did you consult lawyers about that? Mr Hartnett said, No. It was not just that he did not consult you; he did not consult lawyers. Yet in the Vodafone case, lawyers were involved 1 Having looked at this answers to Q396 and Q3967 in the uncorrected transcript, Mr Inglese has realised that he did not register that Mr Barclay prefaced his question at Q396 with as a matter of law. A Mr Inglese made clear on a number of occasions during the course of the hearing he was unable to offer a legal view on the case because he was bound by legal professional privilege. throughout. If he had consulted lawyers, he would have presumably been told that the apparent legal impediment to the charging of interest a rather odd apparent impediment anyway, as charging interest is fairly standard, as we ve established was no such thing. There was no impediment, and one could charge 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 no impediment? Anthony Inglese: I think Q631 Mr Bacon: Sorry, it was a long question. Let me break it down. It is correct to say that there was no impediment to the charging of interest? Anthony Inglese: I can t comment on that. Q632 Mr Bacon: Okay, but it is certainly correct that neither you nor any other lawyers were consulted? Anthony Inglese: I have already said that one of the things that Mr Hartnett and I have discussed as a learning point is that where there is litigation afoot and a settlement discussion takes place, it is always good practice to consult the litigating lawyers in case something is there. Q633 Mr Bacon: Yes! You have answered what to me is one of the most astonishing sentences. It is blindingly obvious to everyone except, apparently, to Mr Hartnett that what you have just said is sensible and good practice. Mr Hartnett said to you, Oh, one of those cases it s settled. To say that without having talked to a lawyer about the terms on which it is settled is one of the most extraordinary aspects of this. Do you not think that it should be not just good practice but required that when HMRC is settling cases, legal advice is obtained? Anthony Inglese: I think that where there is a piece of litigation on the go I need to take a step back because obviously, I am going to say yes to that one has to remember that in HMRC our clients, if I can call them that, include many thousands of highly skilled tax professionals. They know quite a bit of law as well, and they have the carriage in other words, they have the lead on all these cases. They are the ones whom the lawyers work to. They involve lawyers when it s in their judgment that they need to. I won t spend any time now on it, but there are lots of very good reasons why lawyers should be involved. There are also lots of cases where a settlement discussion is taking place and the law is well-trodden: it s about the facts and it s about accountancy; lawyers don t need to be involved. The main thing that I sought to help this Committee with right at the beginning is that it s a fallacy to think that every single settlement needs to have heavy legal involvement. But where there is litigation, then yes, because the lawyers should be able to offer advice on maybe a key issue in the litigation, or maybe costs or something like that. Chair: That is very helpful. Q634 Mr Bacon: Particularly when the bone of contention for example, whether or not interest was

76 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 52 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office payable was that HMRC had threatened that if a particular client held out, in the way that Goldman Sachs did, interest would continue to be payable. That was 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 worth checking what that thing is that people need to look out for when arriving at a settlement. Q635 Chair: In thanking you for your evidence, can I just ask two very short final questions? Given that a mistake was made, do you agree that the courts should quash the settlement and then reconsider it on a proper legal basis? Anthony Inglese: That is the subject of this imminent judicial review. Q636 Chair: Well, there is not a judicial review, but do you agree that that would be the best way forward? Anthony Inglese: I cannot comment on that. There is an imminent judicial review, and I expect the application will happen soon. HMRC will be responding to the pre-action protocol letter with a letter of our own, and at the moment we are still considering it. Q637 Chair: It is a pre-action. Can I just ask a very final question? I understand that you were obviously concerned with giving evidence on an issue like this. Can you just tell the Committee how much taxpayers money was spent coaching you for today s appearance? Anthony Inglese: Zero I hope it does not show. Q638 Fiona Mactaggart: Chair, can I squeeze in one small question? Would it not be in the interests of the taxpayer not to contest this judicial review, but to concede, to collect the tax that we are owed because of this mistake and to not spend money on lawyers defending a judicial review? Anthony Inglese: I cannot comment on that. Chair: Okay, thank you. Examination of Witnesses Witnesses: Dave Hartnett, Permanent Secretary for Tax, HMRC, and Sir Gus O'Donnell, Cabinet Secretary, gave evidence. Q639 Chair: Welcome. Sorry to have kept you waiting. It is a bit cold in this room, so you were probably 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 I can 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 about oversight and the accountability of large tax deals. We had those discussions and talked about some ways forward. One of the issues you raised was the issue of tax Commissioners, and I am pleased to be able to announce that the Queen has approved two new tax Commissioners: Steve Banyard, the acting director general for personal tax, who started life as a tax professional in the Inland Revenue, has been there all his life and has a deep knowledge of tax; and Simon Bowles, the chief finance officer in the department, who is an accountant by profession, for which I forgive him, because he was at Trinity College, where he read economics that is close to my heart. So there are two new Commissioners, which I think is good. Secondly, as you know, David has written to you about the whole issue of how we move this forward in terms of having some extra accountability, in terms of external professional input into these large deals, and of how we extend the oversight. If you would like, you could go into more detail about those, because he gave just the outline in that letter. There was not time, but the plan will be to work on getting that process in place and having some final proposals go to Ministers by the end of the year. It would be good to get your reaction to that, but if want Dave to go into the details, I am sure he will be happy to do that. Q641 Chair: Okay, I am sure we will come to that. I really am grateful for that and for the meetings that both Mr Hartnett and you held with a representative group from the Committee. In a way, however, those were private and it is important that we get some of the stuff on the public record. Let me start by saying that I think that Commissioners is a misnomer, because it suggests to both Parliament and certainly the public that there is a bunch of people overseeing the work of HMRC who exist outside the executive structure of HMRC, and that is not right. The two Commissioners that you have announced both have tax experience, which is welcome, but they are both part of the HMRC structure, are they not? Sir Gus O'Donnell: Indeed, yes. Chair: I think that is a problem. It brings me to the key issue I hope you will accept this, because then we can have a discussion about how we take the process forward that there are structural problems with the present settlement of how HMRC administers itself, particularly in relation to tax disputes with large corporate bodies. I will present those as two issues and I wonder whether you will accept them on the record. One is that we have to have a proper separation between those who negotiate a particular deal with a corporate body and those who authorise that deal, hence my concern about the Commissioners. Indeed, I think that, in 75% of the cases that were looked at by NAO, there was no separation between those who negotiated the deal and those who authorised it. Dave Hartnett: Chair, I am sorry, but that is not correct.

77 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 53 7 November 2011 HMRC and Cabinet Office Chair: There was no proper separation in 75% of the cases. I would give you the quote, but I have not brought it, because I did not think it would be of contention. It was in paragraph 11 of the NAO Report. I have not brought it, but I have a bit of a memory for 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. There were four where the department put in place specific governance arrangements this is paragraph 11 and in three of those four, one or both of the Commissioners were involved in both negotiating the case and approving the settlement. Q642 Chair: Three out of four is 75%. You might say that it is not a representative sample, but it is 75% of the ones they looked at. That is the first issue. The second is that, when you are talking about 25.5 billion, which, again, is the figure in the NAO Report, there has to be a proper system of accountability for those settlements to Ministers and to Parliament a system that is independent of the machinery of government that is responsible for it. Do you agree that those are the two structural issues with which we have a problem? Sir Gus O'Donnell: Yes. I think it would be fair to explain the context. This is in a world in which we are moving towards doing the large settlements in a very different way from how we used to. That has resulted in very big increases in revenue. I would like to put on the record my thanks to Dave Hartnett for the things that HMRC has done. We would be in a really bad situation if we had not got the extra billions that have been achieved through some of the things that the Revenue has got through in the past few years since the merger. Q643 Mr Bacon: Are you saying that we are not in a bad situation? Sir Gus O'Donnell: We are in a less bad situation than we would be. Mr Bacon: All the newspaper headlines say that we are in a very bad situation. Sir Gus O'Donnell: Well, we are not in the euro, Mr Bacon. Q644 Mr Bacon: Thank goodness. But that money coming in also depends on how much is being lost through the settlements. Sir Gus O'Donnell: Indeed, but I would say that the real savings of 1.4 billion, starting at a time when staff are being cut by about a quarter Mr Bacon: No, no. Sir Gus O'Donnell: when compliance increases have gone up and there is a reduction in the tax gap, all those sorts of things are big, objective, real billions of pounds of savings. To come back to your question, Madam Chair it is important that we answer the questions that are put to us first, on the negotiations and 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 best out of these things, that is exactly right. We need more tax Commissioners to do this, which is why the point that I made right at the start is the crucial one. Secondly, the question of external independence is a very good point. I discussed with you how do we ensure that we can get some external, professional oversight that can look at individual cases. Q645 Chair: You will get a lot of opportunity to tell us what you are doing, Mr Hartnett. Sir Gus O Donnell, can I come to you with this? As head of the civil service, what is your priority? Is it to protect taxpayer confidentiality, or to protect the public interest in ensuring that moneys are due to the Exchequer? 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 have had from HMRC, taxpayer confidentiality has taken precedence over our duty to protect the public interest in terms of ensuring that we get the revenue. Sir Gus O'Donnell: There is a statutory requirement on taxpayer confidentiality we do not want civil servants breaking the law, that is certainly true. But it is absolutely crucial that when it comes to individual cases, the National Audit Office has complete access to all the papers no ifs, no buts; it gets to see them all. I hope that the NAO, as I detect, gets absolute access 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 would want civil servants to break the law; that is a statement of the obvious. If there is a gateway that permits disclosure, they wouldn t be breaking the law, would they? Sir Gus O'Donnell: No. Q648 Stephen Barclay: So could we come to the point about what in statute prevents you from disclosing information to Parliament? Sir Gus O'Donnell: I will be governed by professionals on that. Dave Hartnett: Mr Barclay, as I have said before, I think we agreed at the last sitting that providing assistance to Parliament is one of our functions. But it is quite a big step from providing assistance to actually providing detailed information about individual taxpayers. As I think we explored before this is in my letter to the Chair; I m sorry, I can t remember the date but it was when I set out the law on taxpayer confidentiality the Commissioners of HMRC have a role in determining the approach to taxpayer confidentiality, and in 2009 they made a decision about that. Last time we also explored very tentatively whether there was a way of having a confidential briefing before the Committee, which was maybe manageable within the general strictures but did not become public. Q649 Stephen Barclay: Sure, but those are different issues. If a mistake has been made or the law has been

78 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 54 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office broken, does Parliament not need to know so that it can consider whether the law needs to be amended? Dave Hartnett: Taking a mistake that we have discussed before, Parliament does know about it because the NAO reported it. Chair: No, Parliament knows about it because The Guardian reported it, and Private Eye not because the NAO reported it. Paul Keane: We did report a mistake in the Report we 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 size of the mistake; we don t know the value of the mistake. Dave Hartnett: With respect, didn t Mr Morse give you a number at the last hearing? Chair: A range. Can I just put it to you this way? If it had been a grant to Goldman Sachs of anything between 5 million and 10 million, or whatever, we would all know about that. 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. It was in the Report. You were told about it. Q651 Stephen Barclay: We are trying to establish the legal position rather than the NAO view. From a legal position in terms of statute, I will come to the question that I put to Mr Inglese: is there any distinction between identifying and non-identifying information in the 2005 Act? Dave Hartnett: I cannot recall a clause that says that, but this won t surprise Mr Barclay we have looked back over tens of years, decades even, to see how taxpayer confidentiality has been applied, and it has constantly been applied like that. This goes back to your point about the role of the Commissioners, and they have made a distinction between identifying and non-identifying information. Q652 Stephen Barclay: But we were not looking at the historic legal position. You have been quoting the 2005 Act, which does not draw a distinction, so it is policy reasons that go to the heart of why you are not disclosing. The point is, you have discretion, but the argument you have been putting repeatedly is that by law you are prevented by the 2005 Act from disclosure, and yet that Act has a gateway, so do you accept that you are not prevented from disclosure by the 2005 Act? Dave Hartnett: All my advice so far has been that my colleagues and I are prevented by the Act and by the decision of the Commissioners. Q653 Stephen Barclay: Even when information is in the public domain. Dave Hartnett: Even when information is in the public domain, unless it is in the public domain lawfully. Q654 Stephen Barclay: Well, one assumes that appearing in Vodafone s company accounts is lawful disclosure in the public domain. Dave Hartnett: Frankly, it depends what appears in Vodafone s accounts. Chair: I shall go to Ian and then I want us to get back to the principal stuff before we come to the specifics. Q655 Ian Swales: On this organisational and accountability question that the Chair started with, I think I am right in saying that it is very welcome news that we have two new tax Commissioners six of the 10 executive committee members are also tax Commissioners. The ones missing are the chief people officer, the chief information officer and, ironically, Mr Inglese, whom we have just had in front of the Committee. But six of the executive committee are now Commissioners. Of those six, four are actually on the board of HMRC, and the rest of the board is made up of five non-executives. The key point here, as I understand it, is that the non-executives do not have access to what you would regard as confidential taxpayer information, which is the type of problem that we have in this Committee. In other words, we have a little circle here at three levels, which are basically the same people, but slightly fewer at each level. In terms of assuring us, how do you feel about the levels of control and scrutiny of large deals, given that structure? Dave Hartnett: I think, Mr Swales, this is one of the things I am rather hoping to be able to say something about during this hearing. We think there is potentially a significant role, a non-executive role, for looking at the large settlements. What do I mean by large? Perhaps 100 million or more. We have to make this manageable. Q656 Chair: How many each year are the 100 million 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 very complicated cases. Q658 Chair: Okay. How many in the 50 million to 100 million range? Dave Hartnett: I am guessing again a number of more 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. May I write to you with the numbers? Q660 Chair: On the issue that we raised in the meeting with you, it seems to us the Goldman Sachs issue is 10 million; the taxpayer lost 5 million, 8 million, 10 million, or whatever the figure is any oversight system needs to capture that. Dave Hartnett: I do not want to get into difficulty here with either taxpayer confidentiality or with the Committee. The figure of 10 million in relation to Goldmans is a number that has been put out in relation to interest. I would not want the Committee to think

79 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 55 7 November 2011 HMRC and Cabinet Office I am trying to be very careful here that that number fixes that matter in the ranges you talked about. Q661 Chair: So what number does? Dave Hartnett: I can t go there, for reasons of taxpayer confidentiality. Chair: You can go there in numbers. You are not identifying any individual. Dave Hartnett: What we are talking about is Goldman Sachs. I think the issue will be resolved if the NAO goes ahead with their more detailed study of cases, with some tax expertise. Q662 Chair: I am really talking about the general here, not the specific. On the general, it seems to me that we still have not resolved the matter. I welcome the new Commissioners, but they are all executives; they are all guys who have worked in HMRC. That does not give you the separation that we are after, and then there is the other thing the oversight. We were at 200 million when we talked to Mr Hartnett last week. He has come down to 100 million. Actually, there is an issue beyond that. Let us take 10 million as the figure. That is a lot of money. We need to have some assurance here in this Committee that there is a proper 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 need to extend the governance structure to bring in some external, professional input that can look at these cases. Precisely the degree of input you need at the different levels of sometimes, it is about tax and sometimes, it is about complexity, so there is more than one dimension to this. Q663 Mr Bacon: Sometimes, it is about process. Sometimes, it is about observing the governance that exists. Sir Gus O'Donnell: Indeed, in which case, you might want to go through a different route for the very big ones. You might want to have someone there all the time, as you go down the track. You might want to eventually get to a point where you are doing sampling, for example, so you will want to graduate it according to your degree of concern, which is absolutely right. I think we can manage both of those things. Q664 Ian Swales: Have you got any proposals on how you might actually achieve that? How could you have more confidence? As we discussed in the private meeting, it is in the interests of HMRC to have such an assurance, not just for the outside world, but within your own processes. Dave Hartnett: We completely agree. Q665 Ian Swales: If you haven t got any answers now, how are you going to get to them and what sort of proposals do you think you will be making? Dave Hartnett: Let me raise seven that we are exploring. The first is something we have already put in place on the back of the National Audit Office Report, and that is much greater or, indeed, complete separation between those who negotiate settlements there are not many negotiated by Commissioners, but some are and those who actually approve the settlements. We have done that already. Secondly, we want to bring much more transparency to the process. Q666 Ian Swales: Just to confirm, you say that you have done that already. Dave Hartnett: We have. Q667 Ian Swales: You have separated negotiation from approval. Dave Hartnett: Yes. Secondly, we want to increase transparency 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 do this is to see whether large settlements could in some way be referred to the first-tier tax tribunal. Chair: I said to you that I think that is complete nonsense, because they are the ones who would sit in judgment if there is any litigation. You cannot expect them to be judging that is just a non-starter, Mr Hartnett. Dave Hartnett: Chair, what I was trying to do was cover the ground. Chair: Okay, but it is a non-starter. Dave Hartnett: The fourth is to see whether we could have some role like an independent assessor, or assessors, to sit alongside Commissioners in the decision-making process. It was put to us at one stage that maybe these individuals could be Commissioners. The difficulty with that is that the Commissioners are charged, in the Commissioners for Revenue and Customs Act, effectively with running the department, so the concept of a non-executive Commissioner would require some change in law, or for the role to be as though it were a Commissioner so, a commissioner-like role without actually being one. Q668 Mr Bacon: On that point, if the situation is as you described it, which I believe it to be, there might be a need for a minor change in the law. Although the Committee does not get involved in policy matters, in terms of the direction of Government policy whether we spend more on roads or rail it would be within the Committee s purview to recommend that the Government looked at legislation if it were to tidy up the administration of HMRC. It would be a relatively minor adjustment, would it not? Sir Gus O'Donnell: I really want to make progress on this. I can tell you how to slow things down dramatically and that would be to go down that route. If you are really interested in changing these things quickly, I would suggest trying to go down the nonlegislative route. Q669 Mr Bacon: What I am interested in doing is getting it right. The present architecture is obviously not adequate. In fact, in our earlier meeting, Mr Hartnett said to us that it just won t do to have tax Commissioners doing deals and then scrutinising them, as it were and he accepts that so the architecture is plainly not there yet. It is important that we have the right architecture and that the institutions are properly staffed up with the right personnel. I am

80 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 56 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office not clear why it would delay things hugely to have a small adjustment. Sir Gus O'Donnell: I suppose I have a bit of inside information here, because I was sitting in Cabinet when they discussed the legislative programme, so I am very aware of the constraints on that programme. I can just imagine the discussions about precisely what level of priority this would have. All I am saying is Q670 Mr Bacon: But you are talking about let us see what the relevant piece of legislation is the Commissioners for Revenue and Customs Act 2005, which was presumably being prepared when you were permanent secretary at the Treasury. That is right, isn t it? Sir Gus O'Donnell: Yes it spanned my period as permanent secretary and then Cabinet Secretary. Q671 Mr Bacon: This could be amended. We are talking about a really quite small change. This could presumably be amended either through a Finance Act or through a small the Treasury is shaking its collective head. Paula Diggle: I am absolutely certain that that could not 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 talking about what s in a name, because I think when you launched this Sir Gus O'Donnell: I want to give you an answer to this, which is effective and quick and does what you want. Q674 Ian Swales: When you suggested this fourth option, you said that it could be implemented in a shadow way, so that the person might not have legal status as a Commissioner but could act. It could be a two-stage process: you could have that situation and then, if you wanted to make the change in law, you could do that. Does that make sense? Sir Gus O'Donnell: We did it with the shadow Monetary Policy Committee set it up straight away, and it operated Mr Bacon: We did it with the Comptroller and Auditor General. Sir Gus O'Donnell: Exactly. Both ways. You can do that. All I am saying is that you do not wait for progress and say, Don t worry, it will be in legislation, we won t do anything until then. I am saying, 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 think will hold much attraction for the Committee but which we have been thinking about, is to create an external regulator of some sort. Q676 Chair: Yes, there is no attraction because there is no money. Right? Dave Hartnett: So, no Oftax Q677 Mr Bacon: Did you say, No tax, Mr Hartnett? Dave Hartnett: Sadly, Mr Bacon, you and I have been here before, and no I did not say, No tax. Then, an increased role for the NAO. I have not discussed that with Mr Morse, but the idea would be Chair: That s not a starter either, because that muddies it. It is like the tribunal you cannot have the tribunal or the NAO taking on a dual role. That is why the only options, out of the ones you have given us, are to have external Mr Bacon would like to call them commissioners bodies, people with credibility and experience to dipstick into the cases with lower monetary value and really look at the ones of a higher monetary value. I would take 50 million plus as a high monetary value. Dave Hartnett: The last one would be to see we would need to explore this with the National Audit Office whether it is possible, as part of whatever the solution is, to put more information into our annual accounts. We would like to see whether we can find a way of picking up Mr Barclay s point, and that is that you don t know how much of that tax is at stake, how much we should collect and how much we actually collect. I think there is a case for finding a way, if we can, of meeting that challenge. Sir Gus O'Donnell: So we do it in the aggregate, as it were, and not in individual cases. Chair: Yes, the aggregate would be brilliant, and we have asked for that. We asked for that figure last time 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 they could be appointed by Ministers in shadow form tomorrow more or less. Legally, would HMRC be able 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 information can be revealed; but it could be if it was a ministerial appointment. Dave Hartnett: There is a question of whether Ministers are the right approach. Another approach, which builds on what Mr Swales and Mr Bacon were saying, is that maybe these were I cannot think of a better badge special non-executives of HMRC for a single purpose, which was overseeing the large settlements. Because they would be non-executives of HMRC, issues of taxpayer confidentiality and the like would be easier to manage. Q679 Meg Hillier: So as an interim, that could happen. On making it statutory, I know that independent assessors exist, and I have worked with them in government very effectively, but they are very independent. They are able to dip in where they choose. Primary legislation is obviously an option, but I completely take the point about how long it could take. Do you know whether, under current law, it

81 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 57 7 November 2011 HMRC and Cabinet Office could be introduced under secondary legislation, or is that something you could write to us on? What I am trying to drive at is how quickly this could be done at a very independent level and whether it could be independent of HMRC. There has been a blurring, which we have gone through it was rehearsed by the Committee before I was on it. Could it be done so that assessors are independent and statutory? Sir Gus O'Donnell: I wanted to get these issues out with the Committee now, because I would like to be able to discuss those sorts of things. You can get something up in shadow form, but maybe there is a question of what you mean by independence. Ultimately, you might say that it has to be statutory independence, in which case there would obviously be some kind of legislation. We can think through the options. All I am saying is that I think we can solve what I regard as the real problem: getting across to you that HMRC does this very well. I happen to believe that, but you need to be happy that it is happening. We could go through the various options of shadow, whether it could be done in secondary and how we would adjust primary, and all the rest of it. Q680 Meg Hillier: I take in good faith what you said, Sir Gus, about having a new way to do these deals to make sure that money is brought in and that taxpayers get some money from the big players. But it is very clear from the Committee that as representatives of the taxpayer, we want to see an independent watchdog. How quickly can that be done? Could you write to tell us? A statutory instrument could be introduced very quickly if it could be attached to the Act. That is easy and could be done relatively quickly with political will; other things could take a lot longer. Sir Gus O'Donnell: The plan is that we would come to you with proposals before the end of the year. You would then have a graduation different things that will take different amounts of time. But I would like to think that there will be at least one option that will give you something fairly immediate. Dave Hartnett: Ms Hillier, may I come in? I cannot immediately think of an enabling power in the Commissioners for Revenue and Customs Act that would enable this to be done through secondary legislation. We then get back to the issue that the Treasury Officer of Accounts raised, but we will explore it. Q681 Mr Bacon: Who appoints HMRC nonexecutive directors? Dave Hartnett: HMRC, by open competition. Q682 Mr Bacon: And who runs the competition? Dave Hartnett: A civil service commissioner, I believe 2. 2 HMRC runs the recruitment exercise, publicising any vacancies in the public domain and selecting on merit. Civil Service Commissioners are involved in all external recruitment and appointment to senior roles in HMRC, although the Ministerial Code and Cabinet Office guidance means Commissioners do not have to be directly involved in the appointment of NEBMs. Q683 Mr Bacon: So the competition is separate from HMRC. Dave Hartnett: The competition will be chaired by a civil service commissioner with senior officers of HMRC and, usually, someone from another department on the panel 3. Q684 Mr Bacon: Is the Cabinet Office involved in the appointment of non-executive directors? Sir Gus O'Donnell: Absolutely. The lead nonexecutive director for Government, Lord John Browne, is based in the Cabinet Office. We have gone through a process of selecting new non-execs on the new boards that have been set up, which are chaired by Secretaries of State across the whole of Government. I cannot say this highly enough: I am really pleased that we have been able to attract very good non-execs who have come in to help in departments and are proving really worth while in terms of their ability to give us, sometimes, commercial input and sometimes to challenge Ministers as to whether we need another new initiative just now. Mr Bacon: I applaud all that. As you know, Lord Browne has appeared before this Committee. Sir Gus O'Donnell: Indeed. Q685 Mr Bacon: My specific question is about HMRC s non-executive directors. Although the structure that you are describing and the way that it is developing is welcome, it seems to me that HMRC non-executive directors must be in an almost unique position in relation to non-executive directors of other departments. Non-execs elsewhere probably feel that they have everything they need in order to scrutinise successfully their departments, with possible exceptions in security and intelligence or defence, although one hopes that those people are securitycleared. But in relation to what we have been discussing about confidentiality, non-executive directors in HMRC are in the same position as pretty much everyone else. They are in the same position as members of the public. They get the same answers. Mr Hartnett has confirmed to us that this actually happens in HMRC board meetings: the answer is given, We can t discuss that with you as a non-executive director, because it would be breaking taxpayer confidentiality. My question is this: aside from what you are talking about doing in relation to the independent assessor or whatever we end up calling it the shadow function that may or may not lead to statute changes is the structure of HMRC and its non-executive directors adequate to enable those people to do their jobs as scrutineers? Sir Gus O'Donnell: Remember that HMRC is different from, say, DCLG. When you are talking about DCLG and setting up a board, you have a Secretary of State chairing that board. In HMRC, you 3 The recruitment process is managed by HMRC and follows the Ministerial Code and Cabinet Office guidance for the recruitment of Non Executive Board Members. With delegated authority from the Secretary of State, the primary membership of the selection panel for NEBM appointments in HMRC is our chief Executive and Non-Executive Chairman.

82 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 58 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office are talking about a non-ministerial department. Right away, you re in a different world. You are right that the analogy is not one for one. HMRC has had a different structure to a standard Department led by a Secretary of State. It is not quite the same. In terms of the non-exec directors, my experience of the board is that they have been quite a challenging lot, to be honest, but they have not got into individual cases. They have been challenging more on overall processes, structures and organisation. Q686 Mr Bacon: But what I am saying is that if they wanted to, they couldn t. There ought not to be limits on 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. As I said to you before, we have the sense of a need for more oversight, and we have had for a while. The difficulty with non-executives and tax is that, like many other non-executives, they have other roles as well. Picking a non-executive who has no other role, and therefore no conflict, or potential conflict, of interest, could have difficulties. Q687 Mr Bacon: That often happens. Somebody will be the director of a bank that lends money to all kinds of corporates, and also a non-executive director of some other plc that is the recipient of loans from a bank or vice versa. Conflicts can arise, but it is all solved by company law and by the requirements on directors to observe their fiduciary duties. Why is it any different here? Dave Hartnett: We have done it the other way round. For a period of time a number of years ago, we allowed one or two of our executive directors to pick up non-executive posts. We found the conflict impossibly difficult. Q688 Mr Bacon: I thought you were going to say they kept on being poached. Dave Hartnett: Impossibly difficult. That has been one of our concerns. At one stage, three of our nonexecutives were immediately retired chief finance officers, two of banks and one of a large global manufacturer. They were great people to have as nonexecutives, but we could not have talked to them about tax that was our view because even though the fiduciary duty was there, we needed to be able to tell the world that these individuals were not seeing tax issues. Q689 Mr Bacon: All the more reason to create a special architecture to Sir Gus O'Donnell: Just on that one point, remember that there is I brought it with me; a hot seller the Cabinet manual, first edition thereof. It refers in the ministerial code not just to the question of conflicts of interest 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 had as a non-exec one of the people you wanted, and you just did some of the things you mentioned casually saying Okay, they can recuse themselves from that there would still be some issues of perception. Q690 Chair: Can I ask you something about this non-ministerial department status? After we had our discussion when HMRC lost all those disks Sir Gus O'Donnell: Two disks, of which nobody has ever 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 they existed or not? It is an interesting question. Q691 Chair: What I wanted to ask you was this. At that time, Alistair Darling felt he was accountable, and he came and explained himself to Parliament. Sir Gus O'Donnell: And, if you remember rightly, the person in charge of HMRC at the time, Paul Gray, resigned. He knew nothing about the disks and was not involved with them Chair: But the point is that the Minister was accountable. Sir Gus O'Donnell: He took it on his shoulders and he resigned. Chair: The Minister felt accountable. Sir Gus O'Donnell: But the official resigned. Q692 Ian Swales: But it is this question about a nonministerial department being accountable to Parliament. One thing to be explored is what do we mean by and how do we exercise that point about being accountable to Parliament? This is what, I think, the Chair is getting at. How that link operates in practice also needs clarifying. Sir Gus O Donnell: I think very much through the Minister and the Treasury the Minister responsible. Q693 Stephen Barclay: You referred to that in your letter of 19 October. In fact, one of the reasons for not disclosing to Parliament is because you also don t disclose to Ministers. Sir Gus O Donnell: No, we don t disclose individual tax matters to Ministers. That s right. Q694 Stephen Barclay: Why is that? Surely Ministers are coming to information in various forms all the time? If there is a conflict of interest, you would get another Minister to act. Sir Gus O Donnell: No. Well, you could argue that if you want to go down that route, where we give Ministers access to individuals tax records, but I would strongly oppose it. Stephen Barclay: We are not talking here about individual people; we are talking about large corporates. This is like the nonsense in this letter that talks about the European Court of Human Rights. We are not talking about people s family life; we are talking about settlements with large corporations. Sir Gus O Donnell: What if it is an individual who is in charge of a large corporation? Q695 Stephen Barclay: Sure, and you have that within the governance. The two cases that we are trying to get to in these hearings, which are Vodafone and Goldman Sachs, are not dealing with individuals family life we are talking not about sole traders, but about large corporations. Yet this letter sets up a number of policy red herrings, where they could be managed in other ways.

83 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 59 7 November 2011 HMRC and Cabinet Office Likewise, one of the other reasons you put forward is that it has a damaging effect on other Government Departments. If a company is breaking tax law, why is disclosing that damaging another Department? Could you give me an example of how that would be damaging another Department? Dave Hartnett: I am just trying to think of an example where disclosure could impact another Department. It may be, Mr Barclay, that we learned something through our inquiry. Sir Gus O Donnell: Let me give you some examples. There have been tenders for contracts where a number of companies are involved, and one of them may well be in a situation where they are in litigation. Q696 Stephen Barclay: If an individual Minister has a conflict, you get another Minister to deal with it. Sir Gus O Donnell: No. I have not mentioned a Minister at all. I am saying that there is a procurement issue that a Department is dealing with it may have gone nowhere near a Minister. It is a procurement issue, where we are talking about a tender and where one of those companies is in a very difficult place with HMRC. There are some difficult issues for us as to how we handle those sorts of issue. Q697 Mr Bacon: They did try to solve that one with EDS, when I think about it. It wasn t the prettiest. It actually strengthens your argument. They did try to go down that route. I have to say, Sir Gus, that I completely support what you are saying about keeping the separation. It is absolutely vital that we keep the separation, otherwise you will end up with the equivalent of President Nixon chasing his enemies, which he did, using the IRS. There is potentially a slippery slope, and I think it is very good to have clear boundaries, but there is a separate issue, which is given that that is the case, that it is a non-ministerial department, that tax Commissioners have all the authority they need to sign things off and that they are the ones who do the signing off, rather than Ministers, there is all the more need to have the right structures of transparency and assurance in place. I think we are agreed are we not? that those are not there to an adequate level at the moment. Sir Gus O Donnell: Absolutely. What we are saying is that in the way in which these large tax cases have been negotiated, we have been evolving the governance structure. I think the structure needs to evolve a bit further to have, as Dave mentioned, what is now in place a separation between the negotiators and the people who do the oversight. In addition, if we can find a way through the legal issues, we should get ourselves someone external and professional we probably can t call them a Commissioner, for various reasons, because Commissioners have to run the department, and you want to separate them from running the department who can have oversight of the process. Then we find a way to calibrate the degree of oversight, depending on the size, so we are very intensive on the very large and we go down towards a smaller and more selective sampling process. Q698 Ian Swales: Before we leave it, there is the issue of how you are accountable to Parliament, if it is a non-ministerial department. We ve got a situation where you can t talk about detailed taxpayer records with your own non-exec directors and you can t talk about them with Ministers. We have talked about the independent assessor route, but what about the parliamentary side of it? If Parliament is directly responsible for your activities, how are we going to exercise that function if we have legal barriers thrown up in front of us? Dave Hartnett: One of the things that we would envisage, if we have this independent assessor let me use that badge for a moment that that individual, or those individuals, could report to Ministers on an anonymised basis. They could report to you on an anonymised basis. Q699 Ian Swales: As a member of the Committee. Dave Hartnett: I meant the Committee, yes. We thought that that would be a big step forward. Q700 Chair: Can I ask you one final thing, because of this odd constitutional settlement? HMRC is a nonministerial department. If a mistake is made, as there was in this instance, there should be a disciplinary procedure. You may decide at the end of the day that you do not want to take action and that is perfectly fair. Up to 10 million of taxpayers money went, so there should be a disciplinary procedure. Who is responsible for that? Sir Gus O'Donnell: If a mistake is made in any department let us be honest, HMRC is dealing with multiple cases and billions of pounds all the time, and its turnover is enormous. There will be mistakes all the time. Dare I say it, but all of us make mistakes? None of us is perfect. That is the way of things. It is right for the department to have, within its structures, ways to look at individuals and accountability. All of us are accountable to someone. David is accountable to Lesley Strathie, who is the chief executive of HMRC. Lesley is accountable to me. She is one of my direct reports. I have a large number of direct reports, as you can imagine. That is the structure. It looks at whether people are performing well and whether they are operating in accordance with the code of honesty, which is required of all civil servants. That is absolutely clear. Q701 Chair: So in this particular instance with Goldman Sachs, where, because of Lesley Strathie s leave, David Hartnett is fulfilling both her job and his own job, are you undertaking a disciplinary or an investigation of the particular circumstances that have caused this Committee quite a lot of concern, to see whether any disciplinary action should be taken? Do you see that as your job? Sir Gus O'Donnell: Can I just ask Dave to come in first? Dave Hartnett: Sure. Again, Chair, I need to be careful, but there was a thorough review of this mistake. Q702 Chair: Who carried that out? Dave Hartnett: The head of the large business service.

84 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 60 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Q703 Chair: Was he one of the people I do not know who that is. Dave Hartnett: It was a woman, who is now retired. The learning points were identified and the error was taken into account in someone s annual appraisal. Q704 Chair: In? Dave Hartnett: In someone s annual appraisal. It affected their non-consolidated pay, because there was no pay rise that year. Q705 Mr Bacon: They didn t get a bonus. Dave Hartnett: That is another way of putting it, Mr Bacon. I am not allowed to call them bonuses. Q706 Mr Bacon: Presumably you do not have any of these structures in place where the bonuses are paid in such a way that they do not attract national insurance. Dave Hartnett: No. Q707 Mr Bacon: But you do have a property deal whereby your buildings are evading or avoiding tax, don t you? Dave Hartnett: Don t I remember the NAO determining that that was a very good deal for the nation? Mr Bacon: You possibly do, yes. Sir Gus O'Donnell: I can assure you that they are all paid in cash, subject to tax and full national insurance. Mr Bacon: I thought you were going to say in brown envelopes. Sir Gus O'Donnell: No. Fully taxable and NICable, as they say. Q708 Mr Bacon: Mr Hartnett, there are a few things that are established things between us, based on our previous hearings. They are a things that I think are facts, rather than conjecture. I want to confirm whether they are right. The first is that you invited the head of Goldman Sachs tax in New York to come to London for a meeting to settle the matter of the unpaid national insurance contributions and other matters. Dave Hartnett: Well, I was trying, as I said last time, to manage the relationship, which was broken. Others were 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 of interest to Goldman Sachs on the unpaid national insurance contributions. Dave Hartnett: I did. Q710 Mr Bacon: There was in fact no legal impediment to the charging of interest as it turned out. Dave Hartnett: Yes. Q711 Mr Bacon: Not only was there no legal impediment, but HMRC had actually warned Goldman Sachs, back in October 2005, that if it didn t settle at the same time as the other banks which had been trying to run with the same national insurance avoidance 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 to comment on a leaked document, but I want to try to be helpful. There were 22 letters like that. That is my understanding. I haven t seen them all. They carried a calculation of interest to 31 October 2005 from memory. If I ve got that wrong, I ll come back to the Committee. Then they said that HMRC was offering to settle without a charge to interest, and I believe that was because there was a legal impediment and the legal impediment applied to all in 2005, or if it didn t apply 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 lawyers about whether or not HMRC could charge interest? Dave Hartnett: We did not consult lawyers. Q713 Mr Bacon: And with regard to the meeting that took place, you didn t know whether there had been 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, by Goldman Sachs, and our people believed the note was a fair reflection of what had taken place. Q714 Mr Bacon: And once the mistake was discovered, you were given legal advice Mr Inglese has basically said this that there were a number of options, one of which was to unwind the agreement that had been reached and, indeed, to charge interest after 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 last time several times you met the leading QC David Goldberg, who was an adviser to Goldman Sachs, for lunch. 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 adviser to Goldman Sachs Mr Bacon: Indeed. I fully accept that that s possible. I don t necessarily think that you ve done anything wrong Dave Hartnett: Thank you. Q717 Mr Bacon: And I m certainly not accusing you of anything. There s a separate question of how one feels. I think the Chairman accused you of having had 107 lunches. I only counted 94 on the schedule, but think how it makes us feel when you ve had that many lunches and we weren t present at any of them. That aside

85 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 61 7 November 2011 HMRC and Cabinet Office Dave Hartnett: May I just say one thing about the lunches? I was concerned about what I saw probably I was the only person in the room who saw it some suggestion of improper behaviour. I went back and had a look at them all and I found three which involved a taxpayer. Q718 Mr Bacon: Right. All that was a predicate, because the point, surely, is not whether you ve acted improperly or not. The point is whether the impression could be created that you had acted improperly, regardless of whether that was a fact. Just as the ministerial code is very clear that Ministers must ensure that no conflict arises, or could reasonably be perceived to arise, between public duties and private interests, financial or otherwise, there s a similar, analogous sentence in the civil service code, which says that you must not accept gifts or hospitality or receive other benefits from anyone which might reasonably be seen to compromise your personal judgement or integrity. I am not questioning your personal judgment or integrity I m just not. For what it s worth, I think that Sir Gus is correct in saying that you have done a lot to bring in extra revenue. But you must surely accept that the pattern of all this behaviour has led some people to conclude quite possibly not wholly unreasonably, 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 the possibility of a perception to arise that there could be a 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 that my line manager, my colleagues and by publishing these engagements people generally understand. The thing I have done most often, I think, is to meet representative bodies to speak over lunch and, occasionally, to meet tax leaders of the major accounting firms to explore difficult issues. Looking back, I have often done that with a colleague so that I am not on my own. We could have explained that much more fully than we have done, but that is the truth of it. Mr Bacon: I am fully prepared to accept that as completely the truth. I am not really talking about the truth; I am talking about Dave Hartnett: We are talking about perception. Q719 Mr Bacon: I am talking about perception. It is perfectly reasonable for people to conclude, however wrongly, that your pattern of behaviour, in blunt terms, looks like you have done a deal with Goldman Sachs, which was done without consulting lawyers, when you are seeing Goldman Sachs s advisers for lunch. That is what it looks like, and people will put two and two together and make seven. That is what people do. It is entirely possible that that is quite wrong I am sure it is wrong but it is not completely unreasonable for people. It just feels a bit odd, even though I am not for one minute suggesting that what you have done is actually wrong. I do not think you have done anything wrong, but do you see the point I am making about perception? Sir Gus O'Donnell: The fundamental flaw with that argument is that, if you discovered that Dave was secretly having these lunches and had not told anybody, it is a fairly weird conspiracy when it is all published, and we took the initiative to publish all of these things. I publish all of my hospitality to a very low level a much lower level, I might say, than a certain 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 publish everything. Sir Gus O'Donnell: But then you will get people coming up and saying, Aha, Mr Bacon, you had lunch with X. Can I put forward a conspiracy theory about you having lunch with X? Q722 Mr Bacon: And what he told me about Sir Gus was Sir Gus O'Donnell: Exactly. The ministerial code has the word reasonable, which you rightly mentioned the first time. I think that is right. Q723 Chair: The problem with this I hope you would accept this is that David Hartnett s position is very different from that of other people, other Ministers and other permanent secretaries, because the decisions he takes are shrouded in secrecy. Do you think it is appropriate that he has these regular lunches not necessarily with individual taxpayers, and even I went through the list we all know that the big corporates do deals either through lawyers or through tax advisers but with those lawyers and tax advisers, when he, in this secret way, is charged with going off and protecting the taxpayer s interest and doing a deal? Sir Gus O'Donnell: You have to get a particular balance in these cases, because it is important that the person who is doing these deals has a relationship and sorts out with them how to manage getting the billions in. It is important, I think, that that relationship should be absolutely transparent. If you have those two things, they are the most important things. I would certainly say that I would not expect Dave to be taking any lavish hospitality. Chair: Well, 107 lunches is quite a lot. What sticks in my gullet is that I have a lot of people in my constituency who get tax credit. I probably have more who get tax credit than many other constituencies. Every week, my surgery is full of people who come in absolutely desperate these are poor, poor people because, usually, there was a mistake by HMRC or because they made a genuine error and didn t give a bit of information to HMRC about a change of circumstance. They are then lumbered with a debt which, if they carry on taking tax credit, is taken off them week by week. These are poor people living on the edge, and it feels so wrong that nobody there thinks, We want to get the best we can out of them.

86 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 62 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Let s treat them humanely. But when you are talking about the Vodafones or the Goldman Sachses, we have got to have relationship, we have to come to a deal and it does not matter if 10 million goes missing. It is a completely different set of principles, which feels unequal 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, a strong desire to help the most disadvantaged and the poorest in society. I completely agree with you that I would be very much on the side of trying to sort out policy decisions that ensured that when we were dealing with groups that had dynamic changes to their income at low levels we had a better way of managing that. Mr Bacon: The getting of a relationship seems to be something that privileged groups such as Goldman Sachs and Vodafone find easier and ordinary taxpayers find more difficult Sir Gus O'Donnell: No. To be fair, it is very hard to get at the most disadvantaged groups, so we work very hard with the people who represent them, citizens advice bureaux for example, to understand the nature Q724 Mr Bacon: We re talking at slightly crosspurposes. I m talking about people who are paying tax, know that they have obligations to pay tax, and are having or trying to have a conversation with HMRC. An accountant came to visit me in my surgery the week before last. He does the books and the tax for a lot of small businesses in the east of England, and he came to see me because in just the past six months he had noticed a perceptible change in the pressure that HMRC was applying to his small business clients. One of them was a company that owed 11,000 in VAT 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 week because it was not in dispute that he owed the money. The sum of 1,500 per week settles 11,000 quite quickly, but instead of accepting that and agreeing that he could keep it up, HMRC just levied him a fine of 1,300. He is now sacking two of his three staff in order to meet the tax liability because he can t do both. I have another case Sir Gus O'Donnell: If I could just say on that case, remember that the time-to-pay arrangements were introduced the advice from HMRC to Ministers suggested this as a good way of helping SMEs. I think it s fair to say that the programme has been taken up dramatically. Mr Bacon: But in that particular case he wasn t given time 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, put forward with advice, there wouldn t have been any of this, would there? There would have been a much stricter regime before the time-to-pay arrangements came in, which was an issue that we put forward under the previous Administration the national economic council. That was a substantial help to SMEs, and it had not existed before 4. Q725 Mr Bacon: I accept that if time to pay is available and is offered and agreed to, it is very helpful, but my point is that it is inconsistently applied. If you are Vodafone you have several billion pounds of cash on your balance sheet and you re given five years to pay a liability, but if you re a small business in my constituency you re not, and you have to lay off staff to meet your liabilities. Another case that this accountant drew to my attention and which, having checked with his clients, he gave me permission to mention, was of a business person who not only was having to fight with cancer but found, as she says in this letter: In addition to my period of illness, we have had a number of clients go out of business owing us money, others who are paying but only what they can afford and others who have taken their work in house to try and save money. That is the context in which people are operating and, going back to my original point about developing a relationship with HMRC, she says: When I rang the number on the letter to ask if I could speak to someone to explain our situation and come to some mutually acceptable solution, I was told that this was not possible. On another case, Mr Hartnett, you know what CIS is the construction industry scheme but there are plenty of people in PAYE who don t. This particular individual had paid his liabilities, and the rest of it was to be offset through the CIS, but when eventually the accountant chased PAYE because he couldn t understand why his client was continuing to get these letters threatening distraint proceedings, PAYE said that it didn t know what CIS was. When he talked to CIS, it said that that it didn t know that it had to hand the information over to PAYE. These are small businesses that are under huge pressure, and they do not seem to get the same kind of treatment. I appreciate that there is a quantum here a bell curve. There are lots of small businesses and you can t have the same frequency of discussion with a large number of people, but it feels very much as if small businesses are getting a much harder time of it, and big businesses are able to have a much more sensible conversation with you. Dave Hartnett: The first thing I want to say, Mr Bacon, is that if you want to send me the cases I will happily have them looked at and will look at them personally as well. I would actually find that very helpful, because I was troubled by one or two things that you said to me. Given that CIS actually gets collected 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 voluntary compliance and that means enabling our customers to fulfil their tax obligations as easily as possible. To that end HMRC have always given time to pay (TTP) to its customers if that is the best way to collect the tax due. To give easier access to a decision on TTP for Small and Medium Enterprises we set up the Business Payment Support Service (BPSS) in November Since then BPSS has dealt with over 440,000 TTP arrangements valued at 7.7b. HMRC has not changed its policy on TTP and has no intention of doing so. So before the BPSS was set up TTP was offered, but access to it was made much easier after November 2008.

87 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 63 7 November 2011 HMRC and Cabinet Office it is an extraordinary idea that our people did not know. If that is right, I want to know all about it. The second thing to say is that we have a developed strategy for small business that is one of support and guidance. I myself chaired a meeting with the software industry just the other day, to see whether a free app could be developed to help the bookkeeping of small business, and I think we are going to get there and that that will be helpful. Those cases will help me understand whether we have got tougher. Q726 Chair: I hope you will take the same view of my poor constituents, who are having to struggle without 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 through some of the big things that Dave has done, there is less pressure on Chair: We don t know how much money he has not got in that s the problem. Sir Gus O'Donnell: I know that in the past, from places like Switzerland, we were getting zero. We are getting a lot more than zero, and it s in very large numbers, so I am delighted with that. And I intend to say it again. Q727 Austin Mitchell: I just want to make it clear that, in the eyes of my constituents, I am a very high taxpayer a very high earner. My tax affairs are in their usual chaos and I am available for lunches on Tuesdays. Dave Hartnett: We have a board meeting every Tuesday, 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 that there were two entirely acceptable approaches: one was to stay with the proposed settlement and one was to put it to one side. After much deep quarrying on oath, he agreed that he had not given a legal opinion as to which option you should take, but he expressed a 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 have understood that correctly I did not listen to Mr Inglese s testimony and if what you have said is right, Mr Mitchell, Mr Inglese gave two options. I think you just said that his personal view was that we should not set aside the settlement, but if I have misunderstood, can you tell me again? Sir Gus O'Donnell: I.e., they shouldn t reopen Chair: It is what he said. Q728 Stephen Barclay: As Austin has raised Mr Inglese s evidence, can we come back to the chronology? As I understand it, Mr Inglese said that you first raised the error with him on 7 December, yet at our last hearing, in response to Richard, you indicated that you had told him on Monday 22 November. Dave Hartnett: I think I said several things, Mr Barclay, in an attempt to be helpful. Would it be helpful if I set out the chronology? Q729 Stephen Barclay: Yes, if you want to take us through it. To refresh your memory, Mr Bacon asked, When did you speak to Mr Inglese?, and you replied, I think on the Monday, but I need to check, Mr Bacon. You think it was the 22nd, after the Friday. Very soon after, yes. Dave Hartnett: Okay. There was another passage when I also said perhaps it was the week later. The meeting with Goldmans was on 19 November. Over the weekend that followed, our banking sector lead became concerned that a mistake had been made in governance it is really important that I stress in governance. He concluded that the matter had to go through our high risk corporate governance process, and discussed the matter with his director, who agreed that that should happen. At the same time, I began to have a nagging doubt about the interest position. Q730 Stephen Barclay: When you say at the same time, you mean over the weekend? Dave Hartnett: Over the end of that weekend. Q731 Stephen Barclay: Was the banking sector lead at the meeting on the 19th? Dave Hartnett: Yes, he was. Q732 Stephen Barclay: So both of you were at the meeting, but neither of you spotted the error at the meeting? 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 we had settled, or whatever the right term is one of his litigation cases. Q734 Stephen Barclay: That was when, sorry? Dave Hartnett: That was in the week of 22 November and I did not say more because, by then, this issue of the interest was going through the high risk corporate programme, which was our governance mechanism. I think it is matter of history now that the high risk corporate programme rejected the settlement. The papers for the high risk corporate programme were prepared by the banking sector lead and the customer relationship manager responsible for Goldmans, and they brought out the interest issue. I was abroad on business the following week. I think Mr Bacon brought out all my movements, at the last hearing, around this time. I was abroad on business for the whole week, and I was informed while I was away that the high risk corporate programme had rejected the proposed settlement on adjustable options because of the interest issue. On returning to the UK, I spoke to Mr Inglese on 7 December, and I asked for his advice as to what the options were in relation to the Goldmans interest issue, and he went on to give me the advice, as Mr Mitchell has described, that there were two options. Having gone back and looked it I was trying to be helpful before.

88 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 64 Committee of Public Accounts: Evidence 7 November 2011 HMRC and Cabinet Office Q735 Stephen Barclay: That is very helpful. There is a slight tension in what you are saying between, in the week commencing 22nd, saying that you notified Mr Inglese that you had settled his case, whilst at the same time saying that by then you had also identified a flaw in the settlement. Would it not be normal when referring to a litigation case with your general counsel, to say, I have settled the case, but I ve spotted a mistake? Dave Hartnett: I have no idea what would be normal, Mr Barclay. I mentioned it to Mr Inglese, and I was confident that this matter was going to be explored by the proper governance process. Q736 Stephen Barclay: The point I am driving at is that you are saying you spotted the mistake over the weekend and yet the following week you are saying to general counsel, We ve settled it, but not telling him there is a mistake. It just seems inconsistent. Dave Hartnett: Because I wanted to be sure as I said to you, I had a nagging doubt. The high risk corporate programme board, with lawyers on it, went on to examine that issue on, I think, 30 November. Q737 Stephen Barclay: So there were no lawyers, I think we established, at the meeting on the 19th? Dave Hartnett: There were no lawyers for HMRC. Q738 Stephen Barclay: So when the banking sector lead and you spotted a mistake, this was a mistake Dave Hartnett: There were different mistakes. Stephen Barclay: These were two different mistakes Dave Hartnett: Yes. I have said that before. Q739 Stephen Barclay: In terms of the file note, at both your last two meetings you said you hadn t actually found the time to read it. I assume you have Dave Hartnett: It wasn t a question of finding the time to read it, Mr Barclay; the issue was being managed by the banking sector lead and the customer relationship manager. Stephen Barclay: I think, actually, you did say, No, not yet, but I will do so and I have not yet had a chance 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. Sir Gus mentioned the importance of transparency. Was a note of this settlement meeting a settlement meeting of such importance that you phoned in advance the head of global tax at Goldman Sachs, which is a very senior post, to fly over from New York produced by HMRC? Dave Hartnett: I don t think so, because Q741 Stephen Barclay: You don t think. Haven t you checked? Dave Hartnett: Well, I haven t found one, Mr Barclay. I have not searched for it; I have asked. But the important issue is this: what the team said to me is that the note from Goldmans about what had taken place came in very quickly I ve seen that note and they found it an acceptable note of what had taken place. Q742 Stephen Barclay: Is it reasonable to conclude, therefore given that this is your third appearance on the same issue before the Committee that if you have not to date found one, there was not a note produced? Dave Hartnett: I don t think HMRC produced a note of that meeting. Q743 Stephen Barclay: Is it not odd, given the importance of transparency, emphasised by Sir Gus himself, that settlement meetings attended by yourself as a tax Commissioner are going ahead without a note being produced? Dave Hartnett: That is because the team thought the Goldmans note, which came in very fast, was acceptable. Q744 Austin Mitchell: After much correction, which colleagues might to comment on, you said the opposite evidently of what Mr Inglese told me. It is a virtue in politics to be deaf, but it is not a virtue on this Committee. Why did you not claim the interest? His opinion was that you could. Dave Hartnett: Mr Inglese certainly said that. There is in our papers a full note of the decision that was made. I m afraid that I am going where you hate me going: it is a taxpayer confidential issue. This is a very comprehensive note that covers a number of things. I don 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 individual taxpayer issues. Q746 Chair: I will bring it to an end now, but it just seems that the whole saga [Interruption.] Have you seen it? Amyas Morse: Yes. Q747 Chair: It just seems to me that this is a big advert for Goldman Sachs; they toughed it out and got let off interest. Don t you feel that that is true? That s what it feels like to me. Dave Hartnett: One of the things that is really important to HMRC and I hope this will happen is that the NAO will come back with tax expertise and look at this. Q748 Chair: You haven t answered the question. What I am drawing this to is that the perception is that there has been huge reputational damage to HMRC. If I was in Goldman Sachs, I would be rubbing my hands and thinking, God, we beat em to it! We got off the tax bill. Sir Gus O'Donnell: I am actually going to defend the vampire squid here. I don t think they would regard such an interpretation as being at all positive for their reputation. Q749 Chair: What about HMRC s reputation? Fiona Mactaggart: Don t they want to look like the tough guys, compared with all the other banks that folded and had to pay interest? Sir Gus O'Donnell: No. Fiona Mactaggart: I would have thought, if I was trying to be a hard-nosed deal banker, that that s what

89 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 65 7 November 2011 HMRC and Cabinet Office corporates are looking for. Goldman Sachs have proved themselves to be the hardest-nosed deal bankers, because they have stuffed the British taxpayer out of I don t know how many millions of pounds in interest. Sir Gus O'Donnell: I think that there were some people some time ago who thought that that was a sensible place for financial services companies to be. When you heard Bob Diamond s lecture, as opposed to his earlier evidence, you began to see people in the financial sector realising that Yah-boo, we got one over on the taxman is actually massively bad for their reputation, and not good. Goldmans would think that, as well. Q750 Chair: Do you accept there s reputational damage to HMRC? Dave Hartnett: There is reputational damage to HMRC by what has been written in many quarters about this. I also think that, because of the information that has been leaked out of our organisation and gone out there, the story is seriously incomplete. Chair: That is why we want better accountability. Dave Hartnett: And that is why we welcome the NAO looking at this. Q751 Chair: Finally, given the sort of coverage there has been over the Goldman Sachs deal and over the Vodafone deal, which we touched on this afternoon, have you considered your own position? Have you considered resigning, or do you feel that you still have the confidence of Parliament? Dave Hartnett: I have thought very hard about both those issues. I have read just about everything that has been written about them. It is incomplete. I have work to do and I have no plans to resign. Chair: Thank you. Sir Gus O'Donnell: It needs to be put on the record yet again that whatever the circumstances of this case, I am extremely grateful to Dave for the work that he has done, particularly with regard to Switzerland and Liechtenstein, which will bring in billions of pounds for the taxpayer that we would not otherwise have got. Chair: Thank you. 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 out HMRC s legal view in relation to the disclosure of taxpayer confidential information to a Parliamentary Committee. The relevant legislation is contained in the Commissioners for Revenue and Customs Act 2005 (c 11), which so far as relevant, provides as follows: 18 Confidentiality (1) Revenue and Customs officials may not disclose information which is held by the Revenue and Customs 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 or not within the United Kingdom) relating to a matter in respect of which the Revenue and Customs have 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 Northern Ireland 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 its behalf, 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,

90 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 66 Committee of Public Accounts: Evidence (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 and customs 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 information about internal administrative arrangements of Her Majesty s Revenue and Customs (whether relating to Commissioners, officers or others). (3) It is a defence for a person charged with an offence under this section of disclosing information to prove 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 not exceeding 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 s hands particularly where the information in question relates to an identifiable person s tax affairs. Section 18(1) prohibits the disclosure of information. It applies to HMRC Commissioners and officials, and to information held by HMRC in connection with a function of HMRC. Where the information disclosed is information relating to a person (including a company) whose identity is specified in the disclosure, or can be deduced from it, the prohibition on disclosure is backed by criminal sanctions. The criminal offence is set out in section 19 of the Act, and is subject to a defence of reasonable belief, which is for the official concerned to prove, that the disclosure was lawful, or that the information had already and lawfully been made available to the public. The existence of the criminal sanction justifies a properly cautious approach to requests for disclosure of information that might fall within the scope of the sanction. It is important to note that, although it is a defence to the criminal offence that the information was already lawfully in the public domain, this does not 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). The effect 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 by HMRC. However, some bodies to which HMRC discloses information are themselves subject to legislative regimes controlling the extent of permissible onward disclosure by them. The National Audit Office is an example 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 the situations in section 18(2)) the effect of that is not to require disclosure. It is rather to require the Commissioner or official to make a decision as to whether or not it would be appropriate in the particular circumstances to disclose 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 statutory requirement. By way of relevant example, there is an obligation to disclose to the National Audit Office as the Comptroller and Auditor General has a right of access to all documents, information and explanation he requires 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 to disclose the information), the decision maker is bound to act consistently with both public law principles and other statutory obligations. The latter include the right to confidentiality enjoyed by both individuals and companies under article 8 of the European Convention of Human Rights, and the protection of individual data under the Data Protection Act 1988 (c 29). The former requires the decision maker to take into account all relevant considerations and to disregard irrelevant considerations, to apply fair process, and to reach (in summary) a reasonable decision. Where there is a power to disclose, a decision whether or not to disclose must be taken in respect of each identifiable piece of information, or identifiable category of information in which all pieces of information have similar characteristics. The first issue that arises in the present context is whether disclosure of identifiable taxpayer information would, or might, be prohibited from disclosure. As noted above, that is an issue that arises in a particularly anxious context because of the possibility that disclosure might amount to a criminal offence.

91 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 67 There is no express power in the legislation to make disclosures to Parliament. The question is therefore whether disclosure would fall within the exception in section 18(2)(a), which permits disclosure for the purpose of HMRC s functions. HMRC recognises that it is part of its functions properly to assist Parliament. On that basis, HMRC has consistently taken the view that it is lawful to pass non-identifying information to Select Committees through this gateway. However, it does not follow from this that it is necessarily properly part of HMRC s functions to provide disclosure of taxpayer specific information to a Select Committee. The question whether it would be so is far from free of doubt and we emphasise again the potentially criminal context in which that question arises. It is far from free of doubt because for example (a) taxpayer specific information is of a different and much more sensitive character from non-identifying information, engaging different statutory duties (such as those arising out of the ECHR); (b) our assessment to date has been that, if taxpayers believe that their information may be disclosed, it will make it very much more difficult for us to collect tax thus having a positively 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 properly and lawfully exercised discretion, disclosure of the information sought (ie sensitive taxpayer specific information) 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 the narrower functions question. The broad factors that are to be taken into account have been the Subject in the past of the most careful consideration by HMRC. In 2009 Edward Leigh MP wrote to Gus O Donnell in relation to HMRC s position on taxpayer confidentiality. Advice was taken from First Treasury Counsel, and there followed a discussion in the Executive Committee (Excom) as to the appropriate course to take. A decision was taken to maintain the confidentiality of information which identifies and relates to specific taxpayers in responding to questions from the Committee. Excom took into account the following particular policy and operational considerations: First the damaging effect on voluntary compliance by taxpayers which would follow inevitably from any relaxation in our approach to taxpayer confidentiality. Any disclosure would undermine the open and transparent basis on which we seek to work with taxpayers, as the most effective and efficient way to collect tax, leading to a reduction in revenues collected without intervention and to additional costs for HMRC and taxpayers. Secondly the damaging effect on Ministers, who by long tradition remain at arm s length from taxpayer specific information, in order to protect them from allegations of impropriety or political interference. Thirdly, the damaging effect on our relationship with other Government Departments and agencies. Successive Ministers have insisted that information may only be disclosed through express gateways in legislation, often against strong opposition, and any change in our stance risks undermining our ability to insist on such express legal gateways. 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 to criminal 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 National Audit Office. That body has the power (Which it has exercised) to call for any information including confidential information relating to an individual taxpayer s affairs. HMRC provides such information. There is thus no question of the clear and acknowledged public interest in effective oversight of HMRC s affairs not being fully met. HMRC provides this information on a confidential basis; and in the knowledge that there is a tailored legislative regime binding the National Audit Office to protect the confidentiality of the information 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 the risk 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 Accounts Please find attached the consolidated responses we promised to provide you at the hearing on 12 October 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.

92 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 68 Committee of Public Accounts: Evidence Q (Stephen Barclay): Was written advice sought in all four of the cases (mentioned in the NAOreport), 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 at different stages, as they consider appropriate. We do not comment in any detail on legal advice sought or given in 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, to provide more information about HMRC's current governance framework for resolving tax disputes and briefly to outline some additional changes we are considering. HMRC first published its Litigation and Settlement Strategy (the LSS) in 2007 and in July this year published an updated version. There has been no change in the principles underpinning the Strategy, however. All disputes must be resolved in accordance with the law; HMRC does not "split the difference" with the taxpayer or enter into "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 other cases, 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 LSS recognises that possibility but makes clear that any resolution of the issue must be consistent with the law and represent an outcome that we would expect from litigation. Similarly, the LSS make clear that if, in the light of the facts of the case, HMRC does not have strong arguments on an issue in dispute, we should concede the point. Governance of Tax Disputes To underpin this strategy, we have developed governance processes which capture all our major cases. These processes 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 Risk Committee is chaired by a non-executive member of the Board and all other members are non-executives. The National 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 can be worked within the framework of our guidance because they do not raise novel or complex issues. Line managers are responsible for assuring the quality of the work that is done. For cases that do raise novel or complex issues, or where there are significant amounts of tax at stake, the lead case worker will bring in the relevant technical specialists (and legal advisers where necessary). The LSS states that HMRC's stance on an issue should be agreed between all the relevant parties. Where consensus cannot be reached, the issue should be escalated up the line management chain for agreement. For our largest cases, chiefly our large business cases, there are specific governance arrangements to ensure that 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 with a business, typically where debate has been continuing for some time. The Programme represents a commitment on both sides to resolving those issues to an agreed timetable. Decisions on the cases in the Programme are taken by the Programme Board, which comprises Directors from a range of business areas, including the Solicitor's Office. In the rare event where the Board cannot reach consensus, the matter is escalated to the HMRC Commissioners. The Managing Complex Risk Programme is a similar programme of work to manage cases of slightly lower value outside the Large Business Service. The HRCP Board also has another role in our governance processes. For any large business case where the total 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 tax under consideration exceeds 250 million or the issues are exceptionally sensitive, the HRCP Board makes a recommendation to the HMRC Commissioners, who must agree the proposals for resolution. In a very small number of cases, different governance arrangements were agreed in the past, for reasons specific to the particular case, but we will not do that going forward. One further aspect of our governance arrangements is worth noting. HMRC has arrangements in place to agree how it is prepared to resolve specific issues where the same point arises in several cases. Typically, this happens where an avoidance scheme has been used but the issue could also be a technical one. Through the Counter Avoidance Group and other panels, the relevant HMRC business areas agree the basis on which an issue may be resolved, setting a framework within which individual cases are worked, including those in HRCP. This is to ensure consistent outcomes for the same issue across different taxpayers.

93 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 69 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 Settlement Strategy (LSS). The NAO also recommended some improvements, designed in particular to ensure clear separation between the analysis and negotiation phase of resolving a dispute and the approval of the proposed settlement. 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 might do 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 from the 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 the following proposals: Updating and improving the visibility of our governance arrangements in this area, incorporating the improvements recommended by the NAO. Supporting the NAO in their further work to examine the reasonableness of some of the settlements in larger cases, which could act as a pilot for incorporating a test of a sample of cases into the regular pattern of NAO audits. Giving a clearer aggregate picture in our Annual Report and Accounts of the additional revenue secured through our process for resolving disputes. Bringing in additional non-executives with significant tax experience to have a role in reviewing and assuring significant settlements. Hitherto, the role of our non-executives has been to challenge and 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 more work and consultation, which we aim to do before the end of the year. We will, of course, keep you informed of progress. Finally, you wanted some background material on the role of HMRC's Commissioners as set out in legislation. I have attached the relevant sections of the Commissioners for Revenue and Customs Act 2005 in an 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 (which may 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 were responsible before the commencement of this section, (b) the collection and management of revenue for which the Commissioners of Customs and Excise were responsible before the commencement of this section, and (c ) the payment and management of tax credits for which the Commissioners of Inland Revenue were responsible before the commencement of this section.

94 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 70 Committee of Public Accounts: Evidence (2) The Commissioners shall also have all the other functions which before the commencement of this section 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 nature given 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 than half 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 Customs Prosecution Office.) Further written evidence from the Permanent Secretary for Tax, HMRC Information Requested at PAC Hearing, 7 November 2011: HM Revenue and Customs Accounts Please find attached the consolidated responses we promised to provide you at the hearing on 7 November I would also like to take the opportunity to clarify what tax under consideration is, since figures have been quoted 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 full investigation of the specific facts has taken place, and analysis of relevant law, and before applying any reliefs or allowances. It is not actual tax either owed or unpaid. In many cases, when HMRC has looked at the full facts it becomes clear that there is no further liability at all. Our experience is that when we look across all relevant issues under enquiry, only around half of the estimate of tax under consideration is tax actually chargeable. The 25 billion figure quoted is not an annual figure. It is a snapshot as at a particular date, including enquiries 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 most potential tax at risk, so that we do not focus our efforts on unproductive small issues. This approach has proved

95 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 71 highly successful, as evidenced by the progressive rise in the Large Business Service s compliance yield since I hope this explanation is helpful, and If you require any further information please do not hesitate to contact 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 Islands in which the judge dismissed a claim that the employer of the bankers Goldman Sachs was in the Virgin Islands? It is assumed that this question relates to the preliminary hearing in the First-tier Tribunal in December 2009 before Judge Williams which was held to determine whether Goldman Sachs International (GSI) was the host employer of the relevant employees, or whether this was Goldman Sachs Services Limited (GSSL), a company registered in the British Virgin Islands. The host employer would be liable to pay any NICs that might be payable. In April 2010 Judge Williams found that GSI was the host employer of the relevant employees and not GSSL, the British Virgin Islands company. This supported the HMRC position. Goldman Sachs appealed this preliminary decision to the Upper Tribunal and the hearing was due to take place in May When the settlement between HMRC and Goldman Sachs was reached, a consent order was signed and submitted to the County 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 the Goldman Sachs case) The amount claimed in the County Court claim form was 30,816,382. We cannot comment on the settlement sum. Q Ian Swales/Margaret Hodge How many large settlements have there been of over 100 million, between 50 million and 100 million and between 10 million and 50 million? TOTAL NUMBER OF LARGE SETTLEMENTS More than 100m More than 50m to 100m m to 50m 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 They followed the House of Lords judgements in January 2008 in the cases of Fleming and Conde Nast which concerned the way that 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 in respect of overpaid output tax for accounting periods ending before 1 May Subsequent legislation in the 2008 Finance Act limited the scope for making claims for these accounting periods by introducing a new transitional period ending 1 April 2009, before which any such claims had to be made. For historical reasons, there are differences in the management information recorded between the Large Business Service (LBS) and Local Compliance (LC). Although these tables represent numbers of settlements, the LBS figures refer to the settlement of individual issues and the LC figures 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 this public 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 s General Counsel and Solicitor approved it (see paragraphs 2.1 to 2.44 of the enclosed memorandum, particularly paragraph 2.36). (b) The Comptroller and Auditor General of the National Audit Office ignored and/or concealed

96 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 72 Committee of Public Accounts: Evidence (c) failure(s) to comply with legal obligation(s) in relation to the Goldman Sachs settlement which I reported to him (see paragraphs 2.57 to 2.64 of the memorandum) and in relation to other settlements, including the Vodafone case (see paragraphs 3.1 to 3.32), in his recent review of HMRC s procedures for settling tax disputes. The Permanent Secretary for Tax misled Parliament on the nature and/or scope of HMRC s power to withhold information for reasons of taxpayer confidentiality (with the apparent acquiescence of his fellow Commissioners, the General Counsel and Solicitor, the Comptroller and Auditor General of the National Audit Office, and the Cabinet Secretary) ostensibly to conceal the afore-mentioned failure(s) (see paragraphs 4.1 to 4.47 of the memorandum particularly paragraphs 4.24 and 4.26 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 then transferred to the Criminal and Information Law Advisory team, which advise the Commissioners and other policy clients on the confidentiality and disclosure provisions in the Commissioners for Revenue and Customs Act 2005 (CRCA 2005), including submissions and evidence to Select Committees of the House of Commons and 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 Interest Exceptions for Official Accountability and Taxpayer Confidence in the Tax System: a Historical Perspective. Executive Summary 4. These comments by the Treasury Committee (Administration and effectiveness of HM Revenue and Customs Sixteenth Report of Session HC 731) provide a good background to this matter: 159. A particular source of controversy has been HMRC s settlement of large tax cases involving corporations. Allegations have been made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved. We pressed HMRC witnesses and the Minister on whether the appropriate processes had been used in two high-profile cases. Dave Hartnett, the Permanent Secretary for Tax, vigorously defended the procedures that had been used to achieve a settlement with Vodafone and argued that figures cited in the press lacked credibility. HMRC said they were unable to comment in relation to another high-profile case for reasons of taxpayer confidentiality 160. We are not in a position to judge whether individual cases were settled appropriately or not. Nor are we challenging the need for taxpayers affairs to be kept confidential. However, the sums involved in some of these cases are enormous The National Audit Office has undertaken work on HMRC s procedures for resolving large tax cases, whilst the Committee of Public Accounts has already recommended that the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed The Exchequer Secretary did not believe it would be appropriate for politicians to be involved in settling individual tax cases. However, he was concerned that the current process did not allow HMRC to respond to allegations against it: We have to remember that some of these allegations question the integrity of dedicated public servants on the basis of little or no evidence, and it concerns me that some of these decisions are becoming politicised and it is quite difficult for HMRC to answer back because they are not entitled to put confidential information into the public domain The public needs to be assured that cases involving large sums of money are being settled correctly. Equally it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committee of Public Accounts that HMRC should consider how the accountability and transparency of the settlement of large and complex tax cases might be improved. We are taking further evidence on how this might be achieved. 5. It is inaccurate and misleading to assert that rules of confidentiality prohibit HMRC from discharging its duties of transparency and accountability to Parliament and the public. Section 18(1) of CRCA 2005 enacts the general duty of confidentiality in these terms: Revenue and Customs officials may not disclose information which 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 One of these exceptions is section 18(2)(a) which provides that the duty of confidentiality under section 18(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

97 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 73 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 in connection 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 personal details of individuals convicted of (and sometimes charged with) tax and benefit offences. A recent press release issued shortly after the evidence by the Exchequer Secretary to the Treasury Sub Committee (referred to 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 on tickets 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 of her four children was severely disabled. During the course of the fraud she increased this to three severely disabled children, and added a severely disabled and unemployed husband, whilst claiming she was working part-time for a temping agency. At the same time, McKnight claimed thousands of pounds in childcare and after-school club costs. HM Revenue & Customs (HMRC) investigators uncovered neither her children nor her husband were disabled. Mr McKnight was in fact employed by a local newspaper, and the temping agency where Jayne McKnight claimed to be employed had never heard of her. Finally, she had never even contacted any of the childcare providers she claimed tax credits for, and her children had never attended 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 vital services. Those who think they can cheat the benefits system should think again. The extra 900 million we have invested in HMRC allows them to step up the fight against benefit cheats and tax fraudsters. Notes to editors 1. Defendant s details: * Jayne McKnight, DOB 9/2/1966, of 107 Owen Road, Wolverhampton, pleaded guilty to being knowingly concerned in fraudulent activity with a view to obtaining payments of Tax Credits contrary to Section 35 of the Tax Credit Act 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 to any information held by HMRC in connection with any of its function, including information that may be in the public domain already. As the availability of information in the public domain is not an exception to the duty of confidentiality a specific gateway is required to issue these press releases lawfully. HMRC applies section 18(2)(a) which permits a disclosure made for the purposes of its function. The Commissioners consider that the duties of transparency and accountability HMRC owes to the general body of taxpayers override any duty of confidentiality it owes to the individual customers concerned; and that in these circumstances such disclosures constitute a lawful interference with the rights of the affected customers to private and family life under Human Rights legislation. 9. The Commissioners are well aware that section 18(2)(a) of CRCA 2005 similarly authorises the disclosure of information about corporate customers involved in controversial settlements to Select Committees of the House of Commons that have oversight functions over the Department, such as the Committee of Public Accounts and the Treasury Committee. As the recent controversy surrounding the Vodafone and Goldman Sachs settlements shows, such disclosures are clearly necessary in order to assure Parliament and the public that 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 to exercise the Commissioners power to forego the collection of tax for reasons of good management and also has the sole delegated authority to exercise the Commissioners power to withhold information for reasons of taxpayer confidentiality (including information relating to settlements he has been involved in) has effectively ensured 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 evidence and submissions: (a) Oral evidence to the Committee of Public Accounts on 28 January (b) Oral evidence to the Committee of Public Accounts on 28 January (c) Oral evidence to the Committee of Public Accounts on 9 March (d) Reply to the letter of 25 March 2009 by the Chairman of the Committee of Public Accounts, Mr Edward 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 the Vodafone settlement.

98 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 74 Committee of Public Accounts: Evidence (f) (g) (h) (i) Oral evidence to the Treasury Sub-Committee on 16 March 2011 relating to the Vodafone settlement. Oral evidence to the Treasury Sub-Committee on 11 May 2011 relating to the Goldman Sachs settlement. Written evidence to the Treasury Sub-Committee dated 15 June 2011 relating to the Goldman Sachs settlement. Oral evidence to the Treasury Sub-Committee on 12 September 2011 relating to the Goldman Sachs and the Vodafone settlements. 12. Select Committees of the House of Commons have unqualified powers to send for persons, papers and records relating to their field of enquiry, and a witness issued with such an order is bound to provide all information and documents requested by a Select Committee even where there would be an excuse in a court of law. The issue of an order for an individual to attend or to provide evidence can exercise these powers formally. However, in line with certain long-standing conventions on the provision of information which have been observed in practice by successive administrations on grounds of public policy, the Committee of Public Accounts and the Treasury Committee have hitherto requested HMRC officials to give evidence to them by means of an informal invitation. Clearly, this concession is based on the understanding that HMRC s witnesses will be as open as possible with the Committees, refusing to provide information only when disclosure would not be in the public interest, which should be decided in accordance with relevant statute. 13. It is apparent from the enclosed memorandum and paper that senior officials of HMRC have consistently breached this understanding in the past few years, despite repeated recommendations by the Committee of Public Accounts and the Treasury Committee. In these circumstances, it will be appropriate 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 concerns that some of these cases have been settled inappropriately for a lower yield than might have otherwise been achieved. 14. In thanking you in advance for your assistance in this matter, I avail myself of this opportunity to renew the assurance of my highest consideration. 6 October 2011 Background Further written evidence from Osita MBA IN THE MATTER OF THE PUBLIC INTEREST DISCLOSURE ACT 1998 HM REVENUE & CUSTOMS PROCEDURES FOR SETTLING TAX DISPUTES Part One: Introduction 1.1 The power to levy taxes is one manifestation of the sovereignty of Parliament. The Bill of Rights provides that no charge on the subject shall be levied by pretence of prerogative without the consent of Parliament (2 Will. and Mar. (. 2), art. 4). Thus since 1689 Parliament has exercised the power to impose taxes and duties and has charged the Revenue authorities with their collection. The produce of their exertions is paid into the Consolidated Fund, which is at the disposal of Parliament for any purposes that Parliament thinks fit. The Revenue authorities are therefore primarily accountable to Parliament for the discharge of their core function of raising the revenue required to fund public services. In Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd 54 TC 503, at 551 (the Fleet Street Casuals case), Lawton LJ noted that ever since the Middle Ages general complaints about the burden of taxation and the misconduct of tax gatherers have been put before the High Court of Parliament, as it used to be called. 1.2 The scope of the Inland Revenue s care and management power was discussed extensively when the case reached the House of Lords Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd (1981) 55 TC 133. Lord Diplock described the power (at page 163) as a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection, and added that if it were established that the Board were proposing to exercise or to refrain from exercising its powers not for reasons of good management but for some extraneous or ulterior reason, that action or inaction of the Board would be ultra vires and would be a proper matter for judicial review if it were brought to the attention of the court by an applicant with a sufficient interest in having the Board compelled to observe the law.

99 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev Lord Diplock also noted (at page 163) that the scope of taxpayer confidentiality is limited to information about individual taxpayers affairs that has been obtained in the course of their duties in making assessments and collecting the taxes. Therefore, it does not necessarily permit HMRC to withhold information about its official conduct (which is protected by Official Secrets legislation that applies to all other Departments) from Parliament and the public for reasons of taxpayer confidentiality. Functions of Commissioners and Officers of HMRC 1.4 Her Majesty s Revenue & Customs (HMRC) was created by the Commissioners for Revenue and Customs Act 2005 (CRCA) by the merger of the former Inland Revenue and Customs and Excise. It is a non- Ministerial department and thus different from most other government departments, which work under the direct day-to-day control of a minister. The Queen appoints Commissioners for HMRC by Letters Patent (section 1(1) CRCA), and in exercising their functions, the Commissioners act on behalf of the Crown (section 1(4) CRCA). This means that ministers have no direct involvement in taxpayers affairs. 1.5 The Commissioners are responsible for the collection and management of revenue (taxes, duties and national insurance contributions) for which the Commissioners of the predecessor departments (Inland Revenue and Customs and Excise) were responsible before their merging into the new HMRC in 2005 (section 5(1)(a)(b) CRCA). The Commissioners are also responsible for the payment and management of tax credits for which the Commissioners of Inland Revenue were responsible before the merger (section 5(1)(c) CRCA). Section 51(3) CRCA provides specifically that this reference to responsibility for collection and management of revenue has the same meaning as references to responsibility for care and management of revenue in previous enactments (such as those interpreted in the Fleet Street Casuals case). 1.6 The Commissioners also exercise all other functions of the Commissioners of the predecessor departments (section 5(2) CRCA) and may do anything which they think necessary or expedient in connection with the exercise of their functions, or incidental or conducive to the exercise of their functions (section 9 CRCA). The Commissioners appoint staff, known as officers of HMRC (section 2(1) CRCA). An officer of HMRC shall comply with directions of the Commissioners (whether he is exercising a function conferred on officers of HMRC or exercising a function on behalf of the Commissioners) (section 2(3) CRCA). All the statutory functions of the officers of the two predecessor departments now vest in officers of HMRC (sections 6 and 7 CRCA). 1.7 There are currently six Commissioners: Dame Lesley Strathie DCB, Chief Executive and Permanent Secretary; Dave Hartnett CB, Permanent Secretary for Tax; Melanie Dawes, Director General Business Tax; Mike Eland CB, Director General Enforcement and Compliance; Steve Lamey, Director General Benefits and Credits; and Bernadette Kenny. The Commissioners meet formally and make decisions within HMRC s Board and Executive Committee (ExCom). ExCom is the executive decision making body for HMRC. The Committee exercises the Commissioners statutory powers and oversees the breadth of HMRC s work. Permanent Secretary for Tax 1.8 HMRC is headed by a non-executive Chairman, Mr Mike Clasper CBE; the Permanent Secretary and Chief Executive, Dame Lesley Strathie; and the Permanent Secretary for Tax, Mr Dave Hartnett. Mr Clasper leads the Board, which provides strategic leadership, approves business plans, monitors performance and ensures the highest standards of corporate governance. Ms Strathie was appointed Chief Executive and Permanent Secretary at HMRC on 13 October 2008: As HMRC s Chief Executive and Permanent Secretary, Ms Strathie is responsible for providing leadership and direction to the Department. She runs all aspects of HMRC s business, ensuring delivery of the strategic objectives and driving continuous improvement. She is a Commissioner and a Member of HMRC s Board and ExCom. As the Principal Accounting Officer (PAO), she is accountable to Parliament for the Department s expenditure and performance. 1.9 Mr Hartnett has been a Commissioner of HMRC since the 2005 merger, having held a similar position previously as a Member of the Board of Inland Revenue. When Mr Paul Gray resigned as Chairman of HMRC following the loss of the Child Benefit database on 20 November 2007 Mr Hartnett became Acting Chairman. Following the appointed of Mr Mike Clasper as non-executive Chairman and Dame Lesley Strathie as Chief Executive, Mr Hartnett was appointed to a new post of Permanent Secretary for Tax on 13 October In this capacity, he works to the Chief Executive and is the senior tax professional in HM Revenue & Customs (HMRC) and is the Deputy Chief Executive. A biography on the website highlights his extensive experience in tax: Dave joined the Inland Revenue in He spent nearly ten years on investigation work before, in 1991, becoming Director of Claims Branch then Financial Intermediaries and Claims Office dealing with schemes for tax relief and deduction at source, non residents and trusts. In 1996, he moved to lead the technical teams on personal taxation then, in 1998, he was appointed Director of Capital and Savings.

100 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 76 Committee of Public Accounts: Evidence 4 He led the 2000 quinquennial review of the Valuation Office Agency before joining the Board of Inland Revenue as Director General (Policy and Technical). Following the merger of the Inland Revenue and Customs and Excise, he became HMRC s Director General for Customer Contact and Compliance Strategy and then Director General for Business. Dave led the development of the rules requiring disclosure of schemes of tax avoidance and the OECD Study of Tax Intermediaries. He was also one of the Commissioners who set up the Joint International Tax Shelter Information Centre (JITSIC). He has had an interest in compliance and enforcement throughout his career and established the High Risk Corporate Programme for addressing compliance issues in big business. (emphasis supplied) 1.10 Thus as Permanent Secretary for Tax, Mr Hartnett has joint delegated authority (with any other Commissioner) to exercise Commissioners discretionary powers under section 5 of the CRCA for the collection and management of revenue (which includes the power to forego the collection of taxes and duties in appropriate cases). Significantly, as Permanent Secretary for Tax, Mr Hartnett also has the sole delegated authority to exercise the Commissioners discretionary powers under section 18 of the CRCA to disclose information for the purposes of a function of the Revenue and Customs (which includes disclosures relating to settlements he has been involved in) First, Mr Hartnett s de facto control of the High Risk Corporate Programme vests him effectively with the Commissioners collection and management powers (including the power to forego the collection of tax) as far as the largest and complex cases are concerned. Under the Programme, the Commissioners (including Mr Hartnett) are, in theory, normally only directly involved in signing off the settlement of the largest tax disputes. However, the Comptroller and Auditor General of the National Audit Office (C&AG) found in his recent review that in two of the four largest settlements they examined one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so In August last year Mr Hartnett reportedly informed the Financial Times (Vanessa Houlder, Tax officials to soften stance on avoidance August ) that HMRC will adopt a less combative approach to resolving tax disputes with businesses. According to the report: Dave Hartnett...said there had been examples of officials being too tough in disputes over tax assessments. HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law, he told the Financial Times.... The Revenue said it would not return to old practices of offering package deals to multiple tax avoiders, which was blamed for encouraging rampant tax avoidance in the early years of the 1990s. Mr Hartnett said: If it is a strong case, we will fight to the death. But he said its litigation strategy, introduced in 2007, had sometimes been misunderstood. I think we got it a bit wrong in the way we explained it to our people. They thought it was a great sword of justice In a subsequent speech Mr Hartnett reiterated his approach to resolving tax disputes (Simon Parry, Daily Mail, 12 December 2010): In my opinion, winning tax disputes at all costs is no way forward in the modern world. We are committed to handling disputes in a non-confrontational way and collaborating with customers wherever possible In spite of the fact that the Civil Service Code states (in paragraph 7): you must not accept gifts or hospitality or receive other benefits from anyone which might reasonably be seen to compromise your personal judgment or integrity, it emerged in June 2010 that Mr Hartnett was the most wined and dined mandarin in Whitehall after the Bureau of Investigative Journalism (a not-for-profit body based at City University London)

101 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 77 revealed that he accepted corporate hospitality 107 times between 2007 and 2009, mostly from the biggest business organisations and their advisers On 25 July 2008 and 19 May 2009 Mr Hartnett had lunch and dinner respectively with officials of Goldman Sachs. On 22 October 2007, he recorded a Drinks Reception by the Hundred Group of Finance Directors of the UK FTSE-100 (currently chaired by Vodafone s chief financial officer who took over from the Finance Director of Prudential). 2 Most prominent amongst his hosts were the big four accountancy firms that specialise in assisting big business and high net worth individuals to avoid tax, with whose representatives he sat down 27 times. He ate with KPMG 10 times and went to one company reception. He also accepted hospitality from PricewaterhouseCoopers (Goldman Sachs advisers in the matter reported below) 7 times ; Ernst & Young four times and Deloitte (Vodafone s advisers in the controversial CFC settlement) three times. It has also been disclosed in a response to a Parliamentary Question that Mr Hartnett has met the Chairman of the UK Board of Partners at Deloitte on 48 occasions since 1 January In response to the report HMRC explained that, The relationships that Dave has forged have enabled HMRC to transform its relationships with business and other taxpayers. This has made a significant contribution 1 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 September 2008 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; 26 October 2007 KPMG Lunch; 8 October 2007 Sheriff of London Lunch; 5 September 2007 Tax Payer Confidential Lunch; 10 July 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 Institute of Chartered Accountants of Scotland-Lunch; 2 February 2007-Steptoe & Johnson-Lunch; 1 February Washington DC Bar-Lunch; 31 January 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 the International Bar Association-Lunch; 31 March 2009-Tax Journal-Lunch; 20 March 2009-ICAS-Lunch; 17 March 2009-General Commissioners-Lunch; 12 March 2009-Egon Zehender-Lunch; 24 February 2009-Tax Council Policy Institute (US)-Lunch; 11 November 2008-Deloitte-Lunch; 20 October 2008-KPMG-Lunch; 15 October 2008-Westminster Forum-Lunch; 9/15/08-Tax Help 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 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 October 2008-Tax Executive Institute-Drinks reception; 22 October Group-Drinks Reception; 12 July 2007-Inst of Chartered Accounts of England & Wales-Drinks Reception; 1 May 200-Institute of Indirect Taxation-Drinks Reception; 22 March Association of Taxation Technicians-Drinks Reception; 11 December 2007-Association of Revenue & Customs-Drinks; 25 January 2007-Employers Forum on Disability-Drinks; 24 January 2007-London Investment Banking Association-Drinks; 7 April 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 Chartered Certified Accountants-Dinner; 3 June 2007-PricewaterhouseCoopers-Dinner; 19 April 2007-Consultative Committee of Accountancy Bodies-Dinner; 3 April 2007-A T Kearney-Dinner; 8 March 2007-Tax Law Committee-Dinner; 6 March 2007-Inst of Chartered Accounts of England & Wales-Dinner; 26 February 2007-Chartered Institute of Taxation-Dinner; 13 February Baker Tilly-Dinner; 17 January 2007-McDermott Will & Emery UK LLP-Dinner; 28 September 2009-KPMG-Dinner; 7 September 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 Individual-Dinner; 10 November 2008-Ernst & Young-Dinner; 5 November 2008-Individual-Dinner; 29 September 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 May 2008-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; 24 September 2009-PricewaterhouseCoopers-Breakfast; 17 September 2009-JP Morgan/Casenove-Breakfast; 30 October PricewaterhouseCoopers-Breakfast; 3 July 2008-KPMG-Breakfast; 7 April 2008-Deloitte-Breakfast; 18 February 2008-KPMG- Breakfast; 27 September 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 most influential 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 concerns of 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 and international 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 has had with the Chairman of the UK Board of Partners at Deloitte in each year between 2002 and 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 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 this commitment. Since 1 January 2006 to the present, he has met the Chairman of the UK Board of Partners at Deloitte on 48 occasions.

102 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 78 Committee of Public Accounts: Evidence to the increased tax yield HMRC has achieved in the period. The Department specifically denied Mr Hartnett had received too much hospitality from the accountancy firms by asserting that: If you are a jockey, you have got to get on to the racecourse In his first presidential speech at the Chartered Institute of Taxation s Annual General Meeting on 17 May 2011, the President, Mr Anthony Thomas (a specialist in the taxation aspects of smaller business and the professions), denounced the special relationship between HMRC and the professional bodies as a myth, asserted that the trust between the professional community and HMRC is at risk, and stated that his discussions with members suggest that the relationship between HMRC and members of the has never been worse. He then criticised the perceived preferential treatment accorded to the large businesses and their advisers in comparison to small and medium-sized businesses and their advisers: We need to return to that healthy tension between HMRC and the tax profession which existed years ago: no special relationships; no cosy conferences; no favours, deals and understandings; no inside tracks and private access. Instead, there was straightforward dealing; openness and frankness with honest broking and above all a genuine willingness to work together with total transparency and integrity.... The job of civil servants is, and always has been, to apply the rule of law in an even-handed manner Secondly, in regard to the information disclosure powers, according to HMRC, Mr Hartnett, as Permanent Secretary for Tax, has the delegated authority on behalf of ExCom to decide on issues of disclosure of information. These powers have been used recently to withhold information about the controversial Vodafone and Goldman Sachs settlements entered into by Mr Hartnett from Select Committees of the House of Commons, for reasons of taxpayer confidentiality However, Commissioners powers under section 18 of the CRCA to disclose information for the purposes of a function of the Revenue and Customs include any disclosure the Commissioners think necessary or expedient in connection with the exercise of their functions, or incidental or conducive to the exercise of their functions. Thus they clearly authorise the disclosure of any information held by HMRC (including taxpayer confidential information) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC. Internal Governance of HMRC 1.20 It would be recalled the Chief Executive Ms Strathie informed the PAC on 16 November 2010 (Q215) that she is not a tax specialist, and on 18 January 2011 the Financial Times (Sue Cameron) reported that: Officials are agog at news that Dame Lesley Strathie, ultimate boss of HMRC, has appointed Carol Bristow a director-level tax expert as her personal aide. (Not even Sir Gus O Donnell, the cabinet secretary, has such a senior personal assistant.) How can Dame Lesley justify it when the civil service faces 25% cuts? Says one insider: It s because she s finding it so hard to cope with the furore over Dave Hartnett Similarly, HMRC s General Counsel and Solicitor, Mr Anthony Inglese, who is responsible for all legal services to HMRC and for corporate governance. According to an official biography: Anthony trained and worked as a lawyer in the Home Office. He became Head Lawyer at the Office of Fair Trading in 1991; then Head Lawyer at the Ministry of Defence in 1995; and in 1997 he was appointed Deputy Treasury Solicitor. From 2002 he was Solicitor to the Department of Trade and Industry (later the Department for Business, Enterprise and Regulatory Reform) before coming to HM Revenue & Customs in March There were two very experienced tax lawyers at the director level (SCS2) at the time of Mr Inglese s arrival. One has since left HMRC while the other was effectively demoted to an SCS1 role in Solicitor s Office. In their place Mr Inglese has recruited three directors (SCS2) none of whom is a tax lawyer. Mr Inglese and the three directors constitute the Senior Management Team of HMRC s Solicitor s Office. 4 Mr Inglese believes that public sector lawyers should be generalists. He was quoted by the The Lawyer magazine (10 August 2009): That s the craft of the government lawyer... You don t stay in the same area and specialise ever more deeply. You move around, broadening and deepening your knowledge of the essential bits of law you need as a government solicitor The recent report of the C&AG s review of HMRC s processes for settlement of large disputes noted (in paragraph 2.35) some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners ability to exercise these powers to resolve tax disputes and reported (in paragraph 2.36) that: In one case, we identified that Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department s Solicitor s Office. In our view, in the particular circumstances of this case, it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail. 4??????

103 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev It would be recalled that when Mr Hartnett appeared before the TSC on 16 March 1011 and was asked by the MP for Hereford and South Herefordshire (Q150): do you think the continued public controversy over the Vodafone case has damaged HMRC?, he responded: Maybe a little, Mr Norman. Can I preface what I want to say by saying that, before coming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayer confidentiality legal strictures on us, refused to say anything about a particular taxpayer. I thought it might be helpful today if I could say something about the mistakes and misconceptions that are out there, because they are significant. I have legal advice that enables me to answer those questions, but I cannot answer detailed questions about the actual tax liability However on 12 September 2010 the very same MP for Hereford and South Herefordshire put it to selfsame Mr Hartnett [Q699] that: There has been a deal done with Goldman, I think I am right in saying, in which they were but Mr Hartnett interrupted him with this remark which directly contradicts his evidence of 16 March: I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I could not do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there was anything I could say about the newspaper reports on this, and they have said no. External Governance of HMRC 1.26 The Comptroller and Auditor General (C&AG) of the National Audit Office (NAO) that audits HMRC s approximately 450 billion of revenues, plays a critical role in ensuring the accountability and transparency of HMRC to Parliament and the public. Section 1 of the National Audits Act 1983 (NAA) provides for the appointment and status of the C&AG. Section 2(2) provides that: the Comptroller and Auditor General shall by virtue of his office be an officer of the House of Commons. Section 1(3) provides that: subject to any duty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion in the discharge of his functions and, in particular, in determining whether to carry out any examination under Part II of this Act and as to the manner in which any such examination is carried out; but in determining whether to carry out any such examination he shall take into account any proposals made by the Committee of Public Accounts Section 6 of the NAA authorises the C&AG to carry out an examination into the economy, efficiency and effectiveness with which HMRC has used their resources in discharging their functions while section 8 of the NAA gives the C&AG a right of access at all reasonable times to all such documents and information held by HMRC as the C&AG may reasonably require for carrying out this examination. Furthermore, section 2 of the Exchequer and Audit Departments Act 1921 (E&ADA), authorises the C&AG to examine the accounts of the receipt of revenue by HMRC on behalf of the House of Commons in order to ensure an effective check on the assessment and collection of revenue. Section 8 of the Government Resources and Accounts Act 2000 provides the C&AG with a right of access to documents and information relating to HMRC s accounts for the purpose of conducting this examination In March this year, I informed the C&AG that due process was not followed by Mr Hartnett in reaching the Goldman Sachs settlement, and that accrued interest was not recovered from the company. The C&AG refused to investigate the matter, maintaining that he had taken on board the concerns raised in [my] letter as part of [his] review of HMRC s procedures for resolving tax disputes on which [he] will be reporting in July as part of the Report on the Department s accounts. In the event, the report (HM Revenue & Customs Accounts: Report by the Comptroller and Auditor General (7 July 2011)) disclosed (in paragraph 2.6) that the C&AG s review only considered whether the Department s processes were adequate to establish a sound position on the amount of tax due but did not involve coming to an independent judgement on the tax liability in individual cases Yet, the review was triggered by what the TSC described as allegations... made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved. Clearly, the C& AG s power under the afore-mentioned section 1(3) of NAA 1983 authorised the NAO to come to an independent judgement on the tax liability in the sample of cases they examined in order to assure Parliament and the public that cases were not settled by HMRC for a lower yield than might have otherwise been achieved The C&AG acknowledged the public and Parliamentary disquiet surrounding the processes but claimed (in paragraph 2.29) that legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently. The C&AG referred to section 18 of the Commissioners for Revenue and Customs Act 2005 (which applies to HMRC) as the authority for this contention. However, section 182 of Finance Act 1989 (which applies to the C&AG and his staff in the NAO) authorised the NAO to disclose in their report any relevant information provided to them by HMRC in order to assure Parliament and the public that large and complex tax cases were not settled for a lower yield than might have otherwise been achieved by HMRC It is important to remember that while the PAC and the TSC have unqualified powers to send for persons, papers and records relevant to their terms of reference, in light of the C&AG s specific information and investigatory powers, his resources (some 880 NAO staff) and his statutory role as an officer of the House of Commons the Committees can expect to rely to a considerable extent on the C&AG rather than on their

104 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 80 Committee of Public Accounts: Evidence own general oversight powers. Moreover, as a public official conferred with statutory discretion, the C&AG is subject to parliamentary accountability and to judicial review on normal principles. The Cabinet Secretary 1.32 It would be recalled that Sir Gus O Donnell, as then Permanent Secretary to the Treasury, led the review that recommended the establishment of a new single revenue department, integrating Customs and the Revenue. Chapter 6 of his report [G. O Donnell, Financing Britain s Future: Review of the Revenue Departments, Cm 6163, HM Treasury, 2004] recommended Clearer Accountability in these terms: Clearer Accountability to Parliament 6.37 For Parliament, there would be better clarity about who should be held accountable for which decision. As a result of this clarity, there will be a better opportunity to hold the relevant person to account In addition to appearances before the PAC, the Executive Chairman should be available to appear before the Treasury Select Committee (and other Select Committees as necessary) to account for decisions that his or her department has taken in exercise of their statutory duties... Ministers and Treasury officials will be primarily accountable for policy These policy objectives are given full effect by the information disclosure provisions of the CRCA. Furthermore, the Cabinet Secretary has ownership of the Departmental Evidence and Response to Select Committees (known as the Osmotherly Rules ) 5. Although the guidance has not been approved by Parliament and has no parliamentary status, Select Committees have from time to time commented on its provisions. The current guidance notes that Select Committees have a crucial role in ensuring the full and proper accountability of the Executive to Parliament and that Ministers have emphasised that, when officials represent them before Select Committees, they should be as forthcoming and helpful as they can in providing information relevant to Committee inquiries. It then went to state, amongst other things, that: 53. The central principle to be followed is that it is the duty of officials to be as helpful as possible to Select Committees. Officials should be as forthcoming as they can in providing information, whether in writing or in oral evidence, to a Select Committee. Any withholding of information should be decided in accordance with the law and care should be taken to ensure that no information is withheld which would not be exempted if a parallel request were made under the FOI Act Although the powers of Select Committees to send for persons, papers and records relating to their field of enquiry are unqualified, there are certain long-standing conventions on the provision of information which have been observed in practice by successive administrations on grounds of public policy. 68. The Government is committed to being as open and as helpful as possible with Select Committees. The presumption is that requests for information from Select Committees will be agreed to. Where a Department feels that it cannot meet a Committee s request for information, it should make clear its reasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (without resorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, Departments will wish to consider whether the information requested could be provided on a confidential basis As explained below, HMRC has refused to comply with the above-stated Osmotherly Rules and Clearer Accountability objectives in recent evidence and submissions to the PAC and the TSC, despite the fact that the former Chair of the PAC brought the matter to the attention of the Cabinet Secretary in March Part Two: The Goldman Sachs Settlement 2.1 On 7 March 2011, I made a public interest disclosure to the C&AG, the Chair of the PAC, and the Chairman of the TSC, indicating that around the time Dame Strathie told the PAC (in relation to Vodafone) that it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private, said Permanent Secretary for Tax, Mr Hartnett, did a deal in private with a multinational company, which I can now identify as Goldman Sachs. HMRC s Criminal Investigation Policy 2.2 The former Chancellor of the Exchequer, Dennis Healey, explained memorably that the difference between tax avoidance and tax evasion is the thickness of a prison wall. As Lord Templeman put it in an article Tax and the taxpayer, (2001) Law Quarterly Review 575, at 587 The tax evader commits a criminal offence punishable with prison, penalties and fines. The tax avoider commits no offence and only risks failure to avoid the tax. 2.3 However, there is a vast grey area between pure avoidance and pure evasion, and as the then Director of the Inland Revenue Compliance Division noted in 1997: 5 After the Cabinet Office official E.B.C. Osmotherly who first formally issued it in 1980.

105 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 81 if an avoidance scheme relies on misrepresentation... or concealment of the full facts, then avoidance is a misnomer; the scheme would be more accurately described as fraud The Commissioners powers of collection and management of revenue extends to the prosecution (through the Revenue and Customs Prosecutions Office (RCPO) of taxpayers suspected of fraud or evasion in relation to all of the taxes, charges and duties within those powers. The wide range of offences available for this purpose include statutory offences such as false accounting (section 17 Theft Act 1968), fraudulent evasion of income tax (section 144 Finance Act 2000), fraudulent evasion of national insurance contributions (section 114 Social Security Administration Act 1992), and fraudulent evasion of VAT and furnishing false information (section 72 Value Added Tax Act 1994). HMRC s main weapon for dealing with serious tax evasion is the common law offence of cheating, which applies equally to all of the taxes, charges and duties within the collection and management of HMRC, because of its harsher penalties (the maximum penalty on conviction is life imprisonment and/or an unlimited fine, in addition to the confiscation of the benefit of the tax evasion). 2.5 However, in exercise of their collection and management discretion, the Commissioners have adopted a published HMRC Criminal Investigation Policy. It provides, amongst other things, that: It is HMRC s policy to deal with fraud by use of the cost effective Civil Investigation of Fraud (CIF) procedures, wherever appropriate. Criminal Investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate. However, HMRC reserves complete discretion to conduct a criminal investigation in any case and to carry out these investigations across a range of offences and in all the areas for which the Commissioners of HMRC have responsibility. 2.6 Since 1 st September 2005, Civil Investigations under by HMRC have been conducted in accordance with the principles set out in of Practice 9 (COP 9) and of Practice 8 (COP 8). The vast majority of cases of serious tax fraud are dealt with by HMRC under its COP, which offers complete immunity from criminal prosecution so long as further false statements are not made as part of the investigation. COP 8 applies to all civil investigations where the procedures in COP 9 are not used. 2.7 Where a taxpayer seeks to take advantage of an avoidance scheme designed to reduce a tax liability, the matter will be investigated under COP 8. Thus the investigation is undertaken with a view to the financial recovery of any tax, plus interest accrued and penalties that may be due. Civil investigation powers are more limited than the criminal investigation powers. Significantly, HMRC cannot obtain information from trust, companies, banks and other third parties located offshore during a civil investigation. However, it is only where evidence of serious fraud is discovered during the course of a COP 8 investigation that the matter may be dealt with under COP 9 or otherwise referred for criminal investigation. 2.8 Thus despite the fact that the Criminal Investigation Policy states, among other things, that HMRC will consider criminal prosecution in cases of tax fraud where documents are falsified or facts misrepresented in the course of an avoidance scheme so as to enhance its credibility, the effect of the above stated application of the policy is that large companies will not be investigated for evasion, even if they have used an avoidance scheme that relies on misrepresentation or concealment of the full facts and would be more accurately described as fraud or evasion. 2.9 However, it does not appear that this was fully explained to the TSC on 16 th March 2011 when Mr Clasper asserted that there is obviously going to be some case somewhere in the world where this is not true, but [UK] companies will not evade, in support of Mr Hartnett s evidence that he cannot remember... seeing a case of evasion in very big business in the recent past. Furthermore, Mr Hartnett told the TSC on that occasion that every time we settle an issue... we look at the penalty position and if necessary we take legal advice; sometimes external legal advice, and on 12 th September 2011 he further stated: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken The Goldman Sachs settlement appears to contradict these assertions, and is set out in considerable detail to illustrate the point. Summary of the Goldman Sachs Case 2.11 A highly artificial structure was established by Coopers and Lybrand (now PricewaterhouseCoopers) for the sole purpose of enabling Goldman Sachs to avoid National Insurance Contributions (NICs) on annual bonuses paid to its high net worth employees in London. Two subsidiaries of the Goldman group were involved in the scheme Goldman Sachs Services Limited ( GSSL ) which provides the service of supplying staff to Goldman Sachs International ( GSI ) and other affiliated entities. GSSL s principal office address is in the British Virgin Islands and its partner-directors are said to have been resident in New York where its fundamental management is said to have been exercised. GSSL was the formal employer of staff who worked for GSI, although GSI funded GSSL s payments to its employees 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.

106 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 82 Committee of Public Accounts: Evidence The payments in question were made under an off-the-shelf scheme ( the Scheme ) which Goldman Sachs International acquired for the sole purpose of avoiding NIC liabilities on the annual discretionary cash bonuses that were paid to the employees concerned in the years in question. The Scheme is one version of an arrangement under which the employer packages employees annual discretionary cash bonuses in a way that ensures that employees receive their cash bonuses precisely as promised (which the employer, given the nature of its business, must of necessity pay) but in a form that is supposed to avoid any liability to NICs. In summary this version of the arrangement was designed to work along the following lines (a) The employer establishes an employee benefit trust ( EBT ) and the EBT incorporates a company ( EBT Co ); (b) EBT Co issues one penny redeemable shares to the EBT and the EBT awards employees options over a fixed number of those shares (adjustable downwards) exercisable for one penny per share; (c) The employer determines the amount of each employee s annual cash bonus, EBT Co redeems the shares that are not required to deliver the bonus and EBT reduces the number of shares under option to take account of this; (d) The employer contributes the annual cash bonus pool to the EBT and the EBT contributes the annual cash bonus pool to EBT Co for the benefit of the holders of the redeemable shares; (e) The employees exercise their options (using employer provided funds); (f) EBT Co uses the annual cash bonus pool to redeem its shares and employees receive their cash bonus on the usual bonus payment date. The absolute certainty of these arrangements is that employees end up with the same cash in hand as they would have received had the employer just determined and paid the employees annual discretionary cash bonuses in an ordinary manner. Indeed, it would be disastrous for the employer s business if the arrangements involved any risk that this would not be the result. Each and every step is planned in advance and executed to a timetable with pre-scripted documents designed to produce that result. The only risk for employees is if they fail to play their part by signing and returning the various pieces of paper with which they are presented at particular stages of the process. In that case they may just have to be paid their bonus in a more straightforward manner. The employer then claims, based on an understanding of the House of Lords decision in Abbott v Philbin [1961] AC 352, that the arrangements avoid any liability to NICs because the employees annual bonus is an option of no value and the cash that the employees receive are not emolument or earnings derived from their employment but the redemption proceeds of shares that initially had no value but which were subsequently enhanced in value to deliver the cash bonus that employees were always promised The matter was dealt with under COP 8. HMRC s published Anti-Avoidance Strategy (AAS) aims to persuade our customers not to attempt to engage in avoidance by... optimising our operational response to avoidance; and changing the economics of avoidance to make it less attractive so that the expected costs, difficulties and risks of attempting avoidance outweigh the expected potential gains. The strategy also emphasises a strategic approach in litigating avoidance cases. Thus between 2002 and 2005, HMRC selected certain test cases (involving 22 employers that used the same scheme) which it litigated With specific reference to Goldman Sachs, on 12 December 2002, HMRC issued notices of decisions in respect of the NICs liability which it said was due from GSI. On 13 December 2002, GSI appealed those decisions. On 10 th December 2003, HMRC commenced proceedings in the Central London County Court seeking repayment of some million of unpaid NICs and interest. The reason for commencing County Court proceedings, whilst the appeal was outstanding, was because HMRC is bound in the collection of arrears of NICs by the Limitation Act On 4 February 2004, the proceedings against GSI were adjourned pending the determination of the appeal. ExCom Settlements of In 2005, HMRC s Executive Committee (ExCom), which included Mr Hartnett, approved terms for the settlement of all the pending litigation. Thus in October 2005, HMRC wrote to the Managing Director of GSI, Mr Housden, stating that the terms of a negotiated settlement that HMRC would find acceptable are: (a) payment of 100% of the NICs outstanding ( 23.2 million) and (b) non-payment of the late payment interest accrued on the NICs ( 10.8 million as at 31 st October 2005). The letter informed Mr Housden that this is an offer that is being made to all participants and warned that for the avoidance of doubt, please note that should litigation be necessary to resolve matters then interest will continue to accrue on the principal NIC debt. Significantly, it also stated that: The payment of 100% of the NIC would mean that HM Revenue & Customs would not seek to invoke the decision in Macdonald v. Dextra Accessories Ltd ([2005] UKHL 47) in respect of the contributions made to the trust, thereby giving a full corporate tax deduction for those amounts. In addition a full deduction, as a trading expense, would be given in the corporate accounts for the NIC paid. 7 The Limitation Act 1980 prevents any action to enforce recovery of amounts due after 6 years from the date on which the liability arose. However, the Act does not apply to 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, thus the Act places a time-bar on action for recovery of NIC.

107 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev In other words, GSI could have accepted the offer without paying anything if it had paid sufficient corporation tax, income tax and NICs for the relevant tax year, as it would have been entitled to a full rebate for the 23.2 million. All the other 21 companies that used the scheme accepted HMRC s terms of settlement but GSI rejected the offer and appealed to the Special Commissions (now First-Tier Tribunal) instead Thus the appeal was pending when HMRC published its Litigation and Settlement Strategy (LSS) in June The LSS sets out HMRC s approach for bringing tax disputes to a conclusion, whether by agreement with the taxpayer, or by litigation. In particular, it focuses on the relevant factors for HMRC when deciding whether to agree a settlement on the issues in question or to proceed to litigation. The LSS complements the AAS as a part of an overall strategy by HMRC to close the tax gap. The tax gap appears predominantly through non-compliance be it innocent mistake, systemic failures, negligence, planned avoidance or fraud. The use of litigation and a more robust approach to settlement of disputes (with or without the use of penalties) can penalise in its own right and so help to reduce the incidence of such behaviours The biggest shift in approach under the LSS is that HMRC must now consider litigation in cases where the taxpayer will not agree to settle for an amount which HMRC considers it could achieve through litigation, in particular in all-or-nothing cases where the taxpayer will not agree to pay 100% of the tax. This contrasts with the previous position (under which the 2005 ExCom settlements were reached) where the Inland Revenue, in particular, was prepared to discount the tax in dispute so as to recognise litigation. Instead, the LSS states that where we have a strong case we should seek full value from settlement or take the matter to litigation. Thus if more than twenty users of a NICs avoidance scheme have paid full value from settlement, HMRC was justified to take the view that it had a strong case against GSI. Moreover, the LSS emphasises (in paragraph 16): in avoidance cases if our legal advice is strong, do not accept settlements for less than 100% of the tax and interest due Consequently, HMRC s position was that there was no question of settling with GSI. As HMRC had already settled with twenty one other taxpayers in 2005, to settle with GSI a few years after would not only be inconsistent with the terms it offered those taxpayers but could be a breach of the Department s statutory obligation to treat all taxpayers fairly in the exercise of its collection and management powers and an infringement of the terms of the LSS. Judgment of the Upper Tribunal 2.20 The appeal brought by GSI on 13 December 2002 was activated by GSI and GSSL in November 2008 by their request for a listing. On 9 December 2008, GSI and GSSL they made a joint application in the restored appeal for a direction concerning a preliminary hearing. Mr David Goldberg QC (instructed by Freshfields Bruckhaus Deringer LLP) acted on behalf of both GSI and GSSL while Mr Malcolm Gammie QC (instructed by General Counsel and Solicitor to HMRC) acted for HMRC In its initial decisions HMRC assumed without further analysis that GSI was the secondary contributor. GSI initially took no point on that. In fact it was GSSL s and GSI s position that the operation of these transactions did not give rise to any liability to make NIC contributions. But in December 2008 GSI sought a preliminary issue which was whether GSI is the secondary contributor in respect of employees of GSSL for the purposes of the 1992 Act and the 1978 Regulations. The preliminary hearing was sought on the basis that its determination should be dispositive of appeals in relation to tax years 1997 and 1998 and largely dispositive of the appeal in relation to tax year The reason for this was that the GSI employees were transferred from GSSL to GSI, meaning there would be a period in the tax year ending 1999 when the question of GSI s liability would have still to be determined Under the Social Security Contributions and Benefits Act 1992, where earnings are paid, both a primary and a secondary NIC are payable. The primary contribution is the liability of the earner but the secondary contribution is the liability of the secondary contributor. Section 7 of the Act explains who the secondary contributor is. In relation to employed earners who work under the general control or management of a person other than their immediate employer, there are detailed regulations in The Social Security (Categorisation of Earners) Regulations 1978 to enable the contributor to be identified By considering the 1978 Regulations and reading across to the provisions which they incorporate or to which they refer, the question that emerged was whether for the purposes of those regulations GSSL was a foreign employer. If GSSL was a foreign employer, then the person who was liable to contribute would be GSI as the host employer. The issue of whether GSSL was a foreign employer is answered by reference to Regulation 119(1)(b) of The Social Security (Contributions) Regulations, which identifies the question as being whether the employer is resident or present in Great Britain when such contributions become payable or then has a place of business in Great Britain. If GSSL, the actual employer, was not present within the terms of Regulation 119, then the person liable to pay the contributions was GSI as the host employer. If GSSL, the actual employer, was present, then it was liable to pay the contributions. There is one qualification to that broad statement, relating to the GSI employees. In relation to them, there can be no dispute that GSI was liable to pay any contribution because, from June 1999, the GSI employees were employed by GSI The issue of whether GSSL was present in Great Britain, (and so meaning that it and not GSI was the contributor), is entirely distinct from the question of whether the scheme worked. If it was established by the preliminary issue that GSSL was the secondary contributor, then the question of liability of GSI (ie whether

108 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 84 Committee of Public Accounts: Evidence the scheme worked) would only arise in relation to the GSI employees for the nine months following June That liability represents only about 25% of the total liability to NIC sought to be imposed by HMRC. The effect of the Limitation Act is that HMRC could no longer issue decisions against GSSL in 2009 if GSSL rather than GSI was the secondary contributor. Mr Goldberg QC for GSI and GSSL stated that at that level, namely 10 million instead of 40 million in rough figures, the claim was likely to be settled Therefore if there was a preliminary issue about the identity of the contributor then there was bound to be a saving in costs because the issues that would eventually have to be determined by the tribunal would be narrower or, alternatively, will in fact be resolved. In the First-tier Tribunal, Dr Avery Jones refused to order a preliminary issue but in the Upper Tribunal, Mr Justice Norris, sitting in private in London on 21 October 2009 allowed GSI s and GSSL s appeal and directed the determination of the preliminary issue by a freshly constituted First-tier Tribunal: see Goldman Sachs International & Goldman Sachs Services Limited v HMRC [2009] UKUT 290 (TCC). 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 December 2009 and the judgment Goldman Sachs International v HMRC [TC00507] was published on published on 26 April As the title of the case shows, GSSL was removed as a party to the appeal. It was not represented before Judge Williams and did not give evidence to him. Instead GSI contended that GSSL was in the jurisdiction and so it, GSI, could not be host employer. HMRC challenged this on the ground that GSSL was not within the jurisdiction as a secondary contributor and that GSI, which was in the jurisdiction, was liable for the secondary contributions as host employer Perhaps, as a result of the artificiality of this approach to litigation by Goldman Sachs, Judge Williams considered it necessary to make a further reservation about the evidence before him. He said (at paragraph 14): I do not know the precise relationship between GSI and GSSL. They are clearly both linked within the Goldman Sachs group or groups of companies in some way, but I have not been given evidence of the nature of that link. I assume that neither of these two bodies controls the other, but the evidence is that they are clearly closely linked in some other way. In the absence of any agreed facts or specific evidence, I assume that for the purpose of this decision that GSSL is a third party and that GSI and GSSL cannot be regarded as the alter ego or alternate personality of each other The learned judge then pointed out (in paragraph 54) that the only submissions for GSSL on the record in these proceedings are that it did not have a place of business in Great Britain at any time relevant to these appeals, and asked: has GSI shown, on the balance of probabilities, that GSSL was wrong in that submission? Rejecting Mr Goldberg s argument that there is a more subtle point here (ie that GSSL can have a place of business for these purposes but not for other purposes ), Judge Williams stated: 55. I do not think this point needs extended analysis in the context of this preliminary issue. There is no specific definition of place of business in the 1979 Regulations or the enabling Act. It is a question essentially of fact, though it may be examined in the context of other legislation dealing with places of business. And I do not need to digress into the interesting issue of whether there is a difference between someone establishing a place of business in the jurisdiction and someone having a place of business here. Nor do I need to reflect on the discussion by Mr Goldberg QC about the meaning of place of business however established. This is because in my view the way the case was put to this tribunal, and to the Upper Tribunal before this provisional issue came for decision and when GSSL was party to the hearings, is such that, applying the balance of probabilities to the evidence and the submissions of the parties including GSSL, the answer is clear Judge Williams then found that GSSL did not have a place of business in Great Britain at any time relevant to these appeals (that is, between 1997 and 2000). He stated as follows: 57. First and foremost, this is what GSSL, as a party to the proceedings, told both this tribunal at an earlier hearing and the Upper Tribunal at the hearing that gave rise to this preliminary question. As it is no longer a party to these proceedings I must put weight on this. 58. Second, this is what the company secretary of GSSL, writing as such on GSSL notepaper from the British Virgin Islands in 1991 told Companies House. It did so to cancel its previous registration of a place of business in Great Britain. Companies House was specifically told that it was to take the letter to be notice of the company s ceasing to have a place of business in Great Britain as from the date of the letter, 31 July This was pursuant to section 696(4) of the Companies Act. That has not been reversed. GSSL remains unregistered. Again, weight should be put on that statement, and the absence of any revocation of that statement, to the central authority dealing with such registrations. 8 In directing the hearing of the preliminary issue, Judge Norris said (at paragraph 43): In considering my approach to remaking the decision, I have tried to avoid being seduced by the blandishments of one side as to its willingness to settle (as to which it has yet made no concrete offer) or by the blustering intransigence of the other and its determination to litigate everything to the bitter end. I think I should approach the prospect of settlement by reference to how responsible parties ought to behave in discharge of their duty to the tribunal. However, it is fair to say that in addition to its duty to the tribunal, HMRC has a statutory duty of fairness to the twenty one taxpayers that accepted its terms of settlement both under the CRCA and under European Union law on the prohibition of State aid.

109 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev Third, that was confirmed by Mr Housden, writing on GSI notepaper as a GSI executive director, to the Inland Revenue Large Business Office on 13 April His letter was in reply to a letter from an inspector asserting that GSSL had a permanent establishment in the United Kingdom and that therefore consideration should be given to applying the US-UK double tax agreement to its profits. Mr Housden s reply stated: GSSL is not considered to have a place of business in London as it does not make sales in the UK but only incurs expenses. You state that GSSL has a fully staffed office in London (and nowhere else). In fact GSSL has no office in London at all. GSSL does not provide services in the UK but provides services to the UK GSSL does employ a large number of people located in the UK. Such persons do not undertake any business activity for GSSL, their work is performed for GSI and associated entities. Where local regulations in the country where GSSL employees work so require, GSSL endeavours to comply with any wage withholding and social security obligations. This they do with help of GS New York or the local country affiliates. Mr Housden confirmed this again the following year, writing on GSI notepaper to HM Inspector of Taxes Large Business Office on 8 May 2000 in a letter headed GSSL Year ended 30 November 1999 : As you are aware, this company [GSSL] is not registered to conduct business in the UK and does not in fact conduct a business in the UK. Historically, the fundamental management of GSSL has been exercised in and from the United States. Accordingly, the company is not required to file accounts with Companies House in the UK. Mr Goldberg QC argued that this was a letter for corporation tax purposes only. I do not read either of these letters that way. I read them as making a series of clear, unambiguous, considered statements in the present tense to explain why the GSSL accounts were not available at Companies House or otherwise to the public or to enquirers in Britain and why GSI did not regard GSSL as within the jurisdiction of United Kingdom corporation tax. The letters also indicate the advantages to GS of that arrangement. I also note that in writing these letters Mr Housden, who I am told was a GSSL director at the time, was not writing in that capacity or on GSSL notepaper or from a GSSL address. He was writing in his capacity at GSI. That is of course consistent with the statements made in the letter that there was no British address for GSSL. That also appears consistent with an agreement between GSSL and GSI that I note below under which Mr Housden had been seconded as an employee to GSI. In addition, they had agreed that the functions in which he worked with regard to employees were being undertaken by GSI for GSSL. 60. Taken together, I put considerable weight on those issues. I would be most reluctant to decide that GSSL was in breach of statutory obligations in its withdrawal or non-renewal of that registration without cogent evidence that this was so when it has itself asserted that its non-renewal of registration was the correct course of action. And I would be most reluctant to find that Mr Housden had misrepresented GSSL s position to HMRC. I do not accept without evidence that deregistration and subsequent representations of this sort would be made by such a company without all necessary advice and consideration. I also consider it important that there is a clear explanation unrelated to tax liabilities why that action was taken. It was not part of a tax avoidance scheme. For example, such evidence as I have seen suggests GSSL made no taxable profits. It was, along with the registration of the company in the British Virgin Islands, a way of keeping information about the GS accounts and payroll out of the public domain and confidential. 61. Fourth, I have had no evidence or submission from GSSL to say that it was wrong in taking that position either in that letter of earlier in these proceedings. 62. Fifth, GSI raised this possibility only in the hearing before me and has not, so far as I can see, raised it on any previous occasion either when appealing against the original section 8 decisions or in the subsequent correspondence. Nor do I know that GSSL is actually aware of this stance by GSI. In addition, when HMRC first took action against GSI about these liabilities, GSI did not raise this point or pass the matter on to GSSL but itself accepted receipt of the appropriate notices. 63. Sixth, there is nothing in the witness statements of the witness for GSI or in the cross-examination of that witness that asserts or clearly implies that GSSL had a place of business in Great Britain. 64. I therefore reject on the facts Mr Goldberg s second argument that I could find that GSSL did have a place of business in Great Britain at the relevant times. In doing so I do not consider I need examine any of the authorities about what a place of business might mean Over the two days of hearing, Judge Williams (in his own words at paragraph 2) heard the evidence of one witness for GSI and was given limited documentary evidence. He then elaborated on this evidence in paragraph 5 of his judgment thus: The evidence before me came from two sources. The first consisted of two witness statements and oral evidence of an individual witness who was not working in the relevant area of the GS group at the times relevant to these appeals but became responsible for some of them after that time, together with an assemblage of documents. The second was correspondence between the parties to the main appeals.

110 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 86 Committee of Public Accounts: Evidence 2.31 Significantly, Mr Housden, who featured prominently in the previous evidence about GSSL, did not give evidence on this occasion despite being present in London. Judge Williams conclusions on the evidence and submissions by Goldman Sachs are as follows: Was GSSL present? 79. In what way was GSSL present? The starting points of comparison have been set out above. It had deregistered from Companies House and did not in that sense have an address for service. It was not liable to United Kingdom corporation tax. It had no place of business in the United Kingdom. Employees and the payroll function The question is whether GSSL was present because it was conducting activities through its employees in the United Kingdom. If it was profiting from such services (and I have no evidence that it did) then it was not paying tax in the United Kingdom on such profit. Rather, its relationship with its employees was restricted because it had passed the benefit of their service to other companies in the GS group in particular GSI. 83. At a late stage in this appeal GSI produced, through its witness, a short Services Agreement, signed and dated 3 October 1988, between GSSL and GSI. The agreement recites that GSSL seconds to GSI and affiliated companies pursuant to a Secondment Agreement concerning certain employees. The agreement then records that: GSI shall provide payroll, benefit, and related administrative services in respect of the employment of the Employees and shall be responsible for the provision of all remuneration, benefits, and perquisites to each Employee. The agreement goes on to provide that GSSL will reimburse GSI for these payments and all administrative expenses. 84. So the functions... about NI contribution collection and statutory payments, were in fact undertaken in the United Kingdom by GSI from the date of that agreement. Mr Goldberg QC was unable to offer evidence about the termination of this agreement, and the witness clearly had no evidence to assist. I therefore take that agreement to be in effect at the times relevant to this appeal. That is also consistent with the point made by Mr Gammie QC that the notepaper used for correspondence by Mr Housden, and more generally with HMRC s predecessors was GSI notepaper, not GSSL notepaper. 85. Under what arrangements were the employees employed? I was given evidence of this both by the witness and in the documents. These included her letter of engagement. The witness told the tribunal that she was not aware of precisely what part of the GS organisation had sought to recruit her or had interviewed her. Her letter of appointment was a GSI letter sent from an executive director at the London GS campus. Like other letters shown to the tribunal it began: I am pleased to offer you employment in London with GSSL. You will be seconded by GSSL to GSI in the capacity of Accountant It then goes on to set out other terms and conditions, as do similar letters to others. All the letters are GSI letters but offer appointment with GSSL and secondment to GSI. 86. I was also shown a 1995 resolution of the board of GSSL resolving that certain individuals were authorised to agree terms of and execute on behalf of the company all employment offer letters, and a series of subsequent resolutions to similar effect. But I was shown no offer letter executed by anyone on behalf of GSSL. They were all GSI letters in the form noted above. Nor were all of them executed by persons named in the resolution I was shown. I was shown one letter to a new employee dated 10 February 1997, and another dated 19 March 1997 signed by someone named in such a resolution, Steven Ricci, but the resolution was dated the following year, on 8 January 1998, and the letters was both GSI letters not GSSL letters designating Mr Ricci in the heading an Executive Director Personnel of GSI. 87. I conclude on the facts that Mr Housden was correct when he asserted to HMRC that GSSL had no staff working for it in the United Kingdom. HMRC do not dispute that GSSL was the employer, but the only evidence I have seen suggests that GSI acted as agent for GSSL in making those appointments. The evidence also makes clear that the employees did not undertake business for GSSL. They undertook business only for GSI or other GS affiliates. Even the payroll and similar functions were performed for GSSL in the United Kingdom by GSI not by GSSL itself Judge Williams then proceeded to consider other relevant factors that informed his judgment in considerable detail: An office or other location in the United Kingdom 88. Mr Goldberg QC also sought, through his witness, to suggest that GSSL was present in the United Kingdom at the GS London campus. I find no significant evidence of that. I do not put much weight on the absence of any nameplate on the doors of offices it may use. Many important public and private offices in London do not announce to the public what they are. More important is the absence, in the evidence, of any regular use by anyone of any notepaper or other stationery indicating an address for GSSL in London. I put no weight on the evidence put forward by the witness of leases. The documents were photocopies of extracts of leases, and not the complete documents. The witness had not seen the original documents, and clearly had no specific knowledge, of any part of their contents or the arrangements made by or under those documents. Nor was it in any way her function to deal with such

111 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 87 matters for any part of GS. The photocopies do not assist. Nor does her evidence about the parts of the buildings occupied, for example, by the payroll function of the GS group. On the evidence of the agreement noted above, that was a GSI function in any event. I saw nothing suggesting that there was any specific part of the GS campus that could be regarded in any way as occupied by GSSL. I regard as accurate the contemporary statement by Mr Housden noted above that in fact GSSL had no office in London at all.... there were no suggestions it had any office, place of business, branch or agency, or employees working for it, anywhere else in the United Kingdom. Banking activities 89. I was also presented with evidence through the witness that GSSL ran bank accounts in London, and paid HMRC from those accounts. Again, I find this of little assistance. The correspondence about setting up the account was not with GSSL but with other GS entities. I was told by the witness that the authority to open accounts rested in New York, not London, or elsewhere. The accounts were operated through powers of attorney, but I was given no evidence about whether those attorneys acted as GSSL attorneys. I do not consider that as a matter of law or fact it can be said that a company that is part of a corporate group is present for these purposes in the United Kingdom because there are individuals who are directors or employees within the group who have powers of attorney to operate its British bank accounts. And the functions for which the payroll accounts were used were in any event being conducted, as a matter of fact and of agreement with GSSL, by GSI. Further, the money in the accounts was largely passing through the accounts from other GS entities to the intended employees or other recipients. Based on the accounts and other documents I was shown, it was not in any sense GSSL money. Service of proceedings 90. I similarly put no little weight on the evidence Mr Goldberg QC sought to introduce through the witness about service of court proceedings. It appeared that all the witness, and indeed her legal advisers, had seen and could produce were redacted photocopies of documents that purported to be parts of court actions involving GSSL. I have no knowledge of the basis on which GSSL accepted service of those documents. I cannot check who the other party was in each case because of the redactions. Nor had the witness seen the originals. Nor did she have any relevant knowledge, because of her employment or otherwise, about the background to any of these documents or about the general GS procedures for receiving and handling such actions. Nor did I receive any evidence from anyone who did have such knowledge. It may have been I do not know that the documents were received by GSI or an affiliate and passed to GSSL, and accepted by GSSL within the GS group. Or it may be that GSSL was nominated as the recipient, whether or not it was obliged to accept them, for reasons the GS group considered appropriate. Or maybe England was regarded as a forum conveniens for the cases and no point was taken about jurisdiction. The only issue on record and the issue on which both Lord Scarman and Lord Wilberforce put weight in Oceanic was that GSSL did not have a registered address for service because it had chosen some years before to withdraw its registration, and therefore its address for service, from Companies House. I am not satisfied that I have seen anything to persuade me that GSSL had an address for service in Great Britain and I find that at the relevant times it did not have such an address. 91. Mr Goldberg QC addressed the tribunal at some length about the rules for service of proceedings. In particular, he developed an argument about the expansion of the scope of the rules of service through the Civil Procedure Rules and otherwise. I record those arguments, but do not find they assist and therefore do not discuss them in detail. I agree with Mr Gammie QC that on the evidence they are largely irrelevant More important is the consideration that regulation 119 imposes both a continuing administrative obligation and a financial obligation to HMRC for each tax month or other earnings period. It is not limited, in the way section 204 was, purely to an administrative issue. It is an obligation more of a kind that Lord Edmund Davies regarded in that case as penal, and therefore to be construed narrowly. With the greatest respect, I do not consider that this liability can be considered in any way as penal. The test has to reflect continuing enforcement and the administrative and fiscal obligations and not merely the limited kinds of presence adequate for the modern rules of service. 93. I also find of little assistance the correspondence between GS and HMRC and its predecessors. This is for the reasons set out above. Most of the correspondence is represented as being undertaken by GSI and not GSSL, and it was agreed between GSI and GSSL that this should be so. There is no clear pattern of correspondence between HMRC and its predecessors and individuals writing as GSSL employees from a GSSL office or address in Great Britain. I find that the correspondence is between GSI and HMRC. 94. I therefore find that even if it would be adequate to establish that presence for the service of proceedings is an adequate form of presence to meet the test in regulation 119(1)(b) an approach I do not accept the evidence put forward does not show even on the balance of probabilities that GSSL could be served in Great Britain by reference to any identifiable location. The presence of individuals 95. If GSSL is not present by reference to any place, then it can be present only by reference to its servants or agents. A further strand of Mr Goldberg QC s argument was that GSSL was present because one of its directors, Mr Housden, was present here. Here again I was faced with the limits imposed by this preliminary hearing. I was given little evidence about Mr Housden and none by him. I am prepared to accept that he had a role, in the English and Welsh company law sense, as a director of GSSL although I do not know what that role was beyond the resolutions I have seen. Even so, with only one exception

112 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 88 Committee of Public Accounts: Evidence brought to my attention, the documentary evidence shows that he did not correspond with others as a GSSL director but as a GSI director (in, I understand, the GS sense of director not the company law sense). That exception was a letter written on GSSL notepaper on 7 October 1999 by Mr Housden for and on behalf of GSSL. The headed notepaper gave an address in the British Virgin Islands, not in the United Kingdom. That does not take the issue forward. 96. I did not see Mr Housden s contract of employment. Given the papers I have seen I have assumed in the absence of more specific evidence that he was one of the many individuals seconded by GSSL to GSI. If he did have a further contract directly with GSSL I have not seen it. If he did have specific duties in the United Kingdom for GSSL (rather than in New York, where GSSL s central management and control was, or the British Virgin Islands, where it is registered) I was not told of them. The tax and related duties he undertook using a British address all appear, from the correspondence, to have been performed for GSI. This was so, as I have noted above, even when he was dealing with the tax and related affairs of GSSL. It is therefore not clear that there is any evidence that he was in any meaningful sense the presence of GSSL in London. Linked with that, although I am prepared to accept or assume that Mr Housden was in the United Kingdom for a significant part of his time, I was given no direct evidence of this or about whether he could be said to be here on the continuing basis noted as reflecting the obligations of a secondary contributor in each tax month or earnings period. 97. I say the presence because I was given details of no other individual who was contended to represent GSSL in the United Kingdom, or to provide his or her personal service to GSSL or act as GSSL s agent. I therefore make the following findings of fact. First, I find that with the possible exception of Mr Housden I was given no significant evidence of any individual present in Great Britain whose presence here could be said to constitute in any way the presence of GSSL for the purposes of regulation 119(1)(b). Second, on the evidence before me I am not persuaded that on the balance of probabilities Mr Housden s presence in Great Britain was sufficient of itself to constitute a presence in the United Kingdom of GSSL for current purposes even if I assume (as it has not been established in evidence) that he was actually present for a sufficient time in the United Kingdom in each earnings period and that I further assume (as again it has not been established in evidence) that he was actually authorised or charged with carrying out in Great Britain any duties for GSSL (rather than GSI, given the terms of the agreement between the companies set out above that I have seen, or more generally the GS group as a whole) of ensuring payroll compliance with the relevant NI contributions obligations. Without those assumptions, the evidence in my view falls far short of the evidence necessary to show presence of GSSL by his presence. (emphasis supplied) 2.33 In conclusion, Judge Williams found (in paragraph 105) as fact that GSSL was the foreign employer and that GSI was the host employer of the two named individuals throughout those parts of the period relevant to these appeals when GSI was not directly their employer GSI appealed the preliminary ruling to the Upper Tribunal whilst the substantive hearing on NICs liability remained pending in the First-Tier Tribunal. The Upper Tribunal listed the appeal for hearing in the middle of In regard to the related issue of whether the avoidance scheme worked (ie succeeded in avoiding liability to NICs), HMRC succeed in establishing in the Upper Tribunal in a similar scheme (Commissioners for Her Majesty s Revenue and Customs v PA Holdings Ltd, published on 7 th July 2010) that employee bonuses paid as a dividend through a scheme to avoid NIC liabilities were earnings liable to NICs and would therefore expect to be successful in showing NICs liability in the case of Goldman Sachs. That judgment was published on 7 July Shortly after, HMRC lawyers obtained legal advice from Malcolm Gammie QC (who also represented HMRC in PA Holdings). His advice, based on the present state of the litigation, was strong within the terms of the Litigation and Settlement Strategy It is clear from the judgment that Goldman Sachs did not disclose fully and accurately all facts and circumstances material for the decisions of HMRC and the Tribunal. Thus under the LSS and COP 8 the amount of any settlement would be expected to be at least the unpaid NIC ( 23.2 million) plus interest (about 20 million as at the end of last year) and an appropriate uplift to cover the penalty element. Moreover, given the value of the case, any such settlement would be expected to be completed between Goldman Sachs and the legal and technical officers dealing with the case. However, it appears that the Permanent Secretary for Tax settled the matter for the unpaid NIC of 23.2 million, and without recourse to the officers dealing with the case. The Settlement of the Goldman Sachs Case 2.36 On 8 December 2010, a meeting took place in HMRC s Solicitor s Office, the note of which is as follows: Present: Anthony Inglese [AI] Alan Evans [AE] (Director SCS2 one of the two representatives of the Solicitor s Office in the High Risk Corporates Programme) [Team Leader, Solicitor s Office] [Case Lawyer, Solicitor s Office] The meeting began with AI reading [Case Lawyer s] of 6/12 and Malcolm Gammie s advice of July 2010.

113 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 89 AE explained that at the High Risk Corporates meeting the previous week a late submission had come in about a deal on which DH had shaken hands with GS. The status of this agreement was not clear. A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal might be protected, the interest might not. [Case Lawyer] said this was not correct; it was all covered, per his note. It was not clear whether DH had settled on 24m or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation [and Settlement] Strategy. A particular concern was the 2005 ExCom settlements with all the other scheme users. AI asked if there was a risk of that being re-opened. [Case Lawyer/Team Leader] saying that whilst we would need to see the settlement paperwork, there would appear to have been a commercial deal, with consideration passing, so this seemed very unlikely to be a problem. It was however, clear that the proposed settlement gave GS no additional penalty for having resisted for 5 more years, including as [Case Lawyer] explained making every conceivable point in the Tribunal, and putting up a stooge witness when Mr Housden was the obvious person to answer questions. Mr Gammie s advice was broadly positive both on whether we had the right GS company and in relation to the scheme. [Team Leader] was asked to find out more about what the 2005 settlements said about interest from SI [Specialist Investigations], but only if this took only a day. GS had apparently suggested the principal might be 16 million. Discussing whether this altered things. [Case Lawyer] pointed out that the claim form and probably the Particulars of Claim in the County Court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. AI said that he would always want to assist Mr Hartnett, but not if this were unconscionable. He referred to the difficulty all those present at this meeting were having justifying a settlement without an interest element. Case Lawyer handed AE complete Excel spreadsheet of the sums claimed, obtained from SI The settlement by Mr Hartnett appears to breach the Commissioners statutory discretion under the CRCA. As highlighted above, the House of Lords set out the limits of that discretion in the Fleet Street Casuals case. That principle was recently affirmed in Wilkinson v. Commissioners of Inland Revenue (2005) 77 TC 78. In the Court of Appeal, Lord Phillips (at pages 104 to 105) drew attention... to Lord Diplock s statement that the Commissioners managerial discretion is as to the best manner of obtaining for the national exchequer the highest net return that is practicable. Similarly, in the House of Lords, Lord Hoffmann pointed out (at page 114) that the Commissioners are not the Crown, owners of the consolidated fund and able to deal with its property like any other owner It also seems to contravene Article 107 of the Treaty on the Functioning of the European Union which prohibits State aid. State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. Paragraph 21 of Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03) states that: The discretionary practices of some tax authorities may also give rise to measures that are caught by Article [107]. The Court of Justice acknowledges that treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria Case C-241/94 France v. Commission (Kimberly Clark Sopalin) [1996] ECR I-4551 ) Furthermore, the settlement is inconsistent with HMRC s Litigation and Settlement Strategy, and HMRC s evidence to the PAC on 16 th November 2010 which led to this conclusion (Eighteenth Report HM Revenue and Customs Accounts): 20. The Department s Litigation and Settlement Strategy states that, where its legal advice is strong, it should not accept settlements for less than 100% of the tax and interest due. The Department maintains that it does set out to prove the tax liability, serve its assessment and then collect what is due. The Department told us that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice. (emphasis supplied) 2.40 In her evidence to the PAC on that occasion, HMRC s Chief Executive, Dame Lesley Strathie, explaining the settlement process stated that after a negotiation there then has to be another commissioner and we have to have legal advice, and emphasised that there is a considerable amount of process before we would ever get to an end result. Based on this evidence, there was no binding agreement between HMRC and the Goldman Sachs at the time of the meeting in the Solicitor s Office on 12 December Thus having been provided with crucial information, including Counsel s opinion, details of interest protected in the County Court, the settlement reached by ExCom in 2005 with other users of the same scheme, and the conduct of Goldman Sachs in the litigation, Mr Inglese would have been expected to take the necessary steps to remedy what all the lawyers accepted was an unlawful settlement but he seemed to consider it his duty to assist Mr Hartnett rather than uphold the law and enforce corporate governance. Ultimately, he

114 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 90 Committee of Public Accounts: Evidence ensured that the deal was completed as agreed between Mr Hartnett and Goldman Sachs without recovering the millions of pounds of accrued interest properly due from Goldman Sachs The pivotal role of HMRC s lawyers in the settlement of tax disputes is underscored by the LSS which states that in all cases, the legal advice from the Solicitor s Office will be a critical factor in decision-making. Ms Strathie made the same point forcefully in the course of her oral evidence to the PAC in November 2010, as the following exchange shows: [Q221] Where there is a legal process, who has the authority to vary it? Dame Lesley Strathie: I go back to the point about the commissioners. There are six commissioners in Revenue and Customs, and they cover different areas, but on any decision there will be a minimum of two commissioners. We will ensure independence and governance of that.... [Q224] And how do you get oversight of potential conflicts of interest? Dame Lesley Strathie: Well, I very much hope, first and foremost, that if there was a conflict it would be self-declared and, if not, that our legal team and our governance would pick that up Incidentally, at the time HMRC s lawyers were completing the paperwork for the settlement with Freshfields LLP according to Mr Inglese s order, Mr Inglese published an article on the LSS (jointly written with Mr Geoff Lloyd, HMRC s Director for Dispute Resolution, in the Tax Journal, 10 January 2011) which appears to contradict the settlement he had just approved. The article stated, amongst other things, that: It is sometimes said that HMRC s Litigation and Settlement Strategy (LSS) stands in the way of a collaborative and commercial approach to resolving disputes. This isn t the case. First of all, to set the context, and as Dave Hartnett made clear in his Tax Journal article on the LSS in June 2007, the LSS is there as a framework to ensure that disputes are resolved fairly and consistently with the law. It underlines the need for a realistic statutory basis for the resolution of any tax dispute rather than, on the one hand, encouraging HMRC to raise enquiries in return for go away money, or, on the other, encouraging customers to bend the rules through avoidance and come out of that with a deal.... In its specifics, the LSS stresses the importance of materiality in terms of the tax at risk in the context of the case or wider deterrent or precedent effects.... The overriding thrust of the LSS that we should not do deals or split the difference where we believe the law points to a different outcome ought not to be controversial: our duty is to collect the tax we believe to be due The article by Mr Hartnett referred to in the paper by Messrs Inglese and Lloyd ( Litigation and Settlement Tax Journal, 11 June 2007) which followed the launch of the LSS states that there are two rules for HMRC staff that stand out in the LSS as bright lines, not to be crossed. The first rule is that each dispute should be settled on its own merits. The second rule, which is directly relevant to the Goldman Sachs settlement, was explained by Mr Hartnett in these terms: The second rule is related to the first: where a dispute arises from an all-or-nothing legal point, settlement terms should also be based on all-or-nothing figures. There should be no compromise where our arguments are strong; equally, we will not hold out for low-value settlements if our arguments are not strong enough to support litigation, or if the issue is one that does not justify the use of litigation in the absence of agreement. HMRC s Duty of Fairness to the General Body of Taxpayers 2.45 In the Fleet Street Casuals case, Lord Scarman explained (at page 176) that: the modern case law recognises a legal duty owed by the Revenue to the general body of the taxpayers to treat taxpayers fairly; to use their discretionary powers so that, subject to the requirements of good management, discrimination between one group of taxpayers and another does not arise; to ensure that there are no favourites and no sacrificial victims. He maintained that: The duty has to be considered as one of several arising within the complex comprised in the care and management of a tax, every part of which it is their duty, if they can, to collect This issue of fairness to the general body of taxpayers has been of concern to various Select Committees recently. The following exchange between Mr Hartnett and the MP for Hereford and South Herefordshire before the TSC on 16 March 2011 relates to the application of COP 8 under HMRC Criminal Investigation Policy to the larger business organisations: Q165. Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue s failure to charge penalties to big businesses when they understated their tax payable. The number was about 15 million and the Revenue promised to do better. How much better are you doing now? Dave Hartnett: If better is in terms of amounts of money, the most recent year has been a lot less than that but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure to take reasonable care. Most of the issues we resolve with big business in the UK are very significant differences of view on technical aspects of taxation, and we cannot charge a penalty in relation to those. Q166. Jesse Norman: The actual number is that six penalties were charged Dave Hartnett: I knew it was small.

115 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 91 Jesse Norman: in 2009/2010 for a total of 442,000, which was one one-hundredth of 1% of the tax that was under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn t better than you promised to do in It feels a lot worse. What is the equivalent percentage of tax under declared for small business? Dave Hartnett: I don t know precisely, Mr Norman, but there is a fundamental difference. Small business in the UK makes up about 50% of the tax gap; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember maybe if I went away for a couple of hours I could think of something seeing a case of evasion in very big business in the recent past. The crucial issue Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasion by big business? Dave Hartnett: It is mostly avoidance, Mr Norman. Q168. Jesse Norman: I find that extraordinary, I must say. Okay. The equivalent rate for small business is about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, if you do it in a systematic and fraudulent way. Why are you so much less tough on big business? Dave Hartnett: I don t think we are less tough on big business. We will take penalties from big business Q169. Jesse Norman: It is 200 times lighter, the amount they pay relative to the tax that is under declared. That feels like pretty unequal treatment to me. Dave Hartnett: What we have to measure is the incidence of at least failure to take reasonable care, or worse, and that incidence is higher in small business than it is in big business. Q170. Jesse Norman: So just to round off, the situation is that you barely fine big businesses who underpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see the numbers on that. Do you think you are offering a credible threat to big business, in line with HMRC s stated objective of charging people the right amount of tax and collecting it? Dave Hartnett: I do, because looking at the intervention yield, which I think Mr Clasper referred to earlier on, over the last four years we have increased that in relation to big business by more than 25%. If I look at the list of cases we have taken to the Tribunal this is all public domain information. Firstly, the Prudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we have won. There were 30 other major companies behind that. They were not named but they funded, in part, the running of that case, so it was not a single case. We are still considering for some of those whether there is a penalty position. If I go back to the 15 million you mentioned earlier on, I happen to know one element of that 15 million rather well, and a large part of that 15 million was one case. Q171. Jesse Norman: In other words, when you can levy a good fine you do it? Dave Hartnett: Absolutely, and the advice we get from the private sector is that a big fine puts senior officials in big companies in serious jeopardy, and that is a very big deterrent. Q172. Jesse Norman: It does raise the question why you do not do more of it to more companies, given that when you do it, you can raise a reasonable sum? Dave Hartnett: Every time we settle an issue, Mr Norman, we look at the penalty position and if necessary we take legal advice; sometimes external legal advice It would be recalled that on that occasion, Mr Hartnett offered the following two definitions (Q264) of avoidance: There are so many... but the two we favour are planning involving a tax position that is tenable, or appears to be tenable, but has unintended and unexpected tax revenue consequences. The second one is taking a tax position that is favourable to the taxpayer without openly disclosing that there is uncertainty whether the significant matters in the tax return accord with the law. Those are the two practical interpretations of avoidance that we use and we find they work pretty well It would appear that the second definition provided by Mr Hartnett is wide enough to include cases of misrepresentation and concealment. Where a taxpayer files a return without openly disclosing that there is uncertainty whether the significant matters in the tax return accord with the law, the relevant scheme would be more accurately described as evasion. Such cases may not amount to serious fraud under COP 8 to warrant a COP 9 investigation or a criminal investigation but they would nevertheless be evasion under the law This can be demonstrated by a short discussion of the common law offence of cheating the Revenue. The authoritative modern formulation of the offence is given the Court of Appeal in R v Less The Times, 30 March 1993: The common law offence of cheating the Public Revenue does not necessarily require a false representation either by words or conduct. Cheating can include any form of fraudulent conduct which results in diverting money from the Revenue and in depriving the Revenue of the money to which it is entitled. It has, of course, to be fraudulent conduct. That is to say, deliberate, dishonest conduct by the defendant to prejudice, or take the risk of prejudicing, the Revenue s right to the tax in question knowing that he has no right to do so.

116 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 92 Committee of Public Accounts: Evidence 2.50 This direction in Less followed the formulation previously approved by the Court of Appeal in Rv Mavji [1987] 1 WLR Maji established that in relation to the conduct element of the offence, there does not need to be any overt act of deception on the part of the defendant: it can be satisfied by an omission to report taxable income, or register for VAT. Mr Mavji was the controlling director of a trading company which dealt in large volumes of gold in such a way that, but for charging and retaining large amounts of VAT, the company would have traded at substantial loss. When HMRC discovered the company had charged and not accounted for over 600,000 in VAT, and had neither registered for VAT not kept any VAT accounting records, Mr Mavji was charged with cheating. His defence was that neither he nor the company had made any representations to HMRC and had not therefore deceived HMRC in any way. The Crown Court rejected this argument, and the Court of Appeal upheld his conviction The evasion element, that is, the diversion of money away from HMRC, need not be successful, and any deprivation need not be permanent. Clearly, the offence still applies where HMRC discovers the fraud and the taxpayer pays the tax. In R v Hunt [1995] STC 819, the Court of Appeal held that cheating is a conduct offence therefore no loss to HMRC need be proved. In R v Less the defendant ran numerous companies which incurred substantial PAYE and NIC liabilities. The corporate group was structured in such a way that those companies never had sufficient funds to pay, or assets worth HMRC proceeding against. However the defendant was not aiming to evade the tax permanently, just to delay the payment; he had in fact made large tax payments over the period. Yet the Court of Appeal upheld his conviction for cheating Finally, the mental elements of the offence are that the conduct (the evasion element) must be fraudulent : that is, the evasion must be deliberate, dishonest, and done in the knowledge that the person has no right to escape payment of the tax. In any event, it is apparent that the Goldman Sachs settlement secured by Mr Hartnett contradicts his evidence that every time we settle an issue... we look at the penalty position and if necessary we take legal advice; sometimes external legal advice Incidentally, Mr Norman returned to this subject at the TSC hearing on 12 th September 2011, and highlighted the similar Prudential settlement: Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some 6.2 billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggesting a list showing 6.5 billion. Something like just under 6 billion of that was from fighting group litigation challenges. Only about 100 million was on corporation tax avoidance cases. That is 100 million out of the 6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunal since My question is: can that really be a decent response to issue of corporate tax avoidance, amounting to evasion? Dave Hartnett: I think, Mr Norman, the first thing I would like to do is look at the analysis of those numbers, because one case-we mentioned it at the last hearing, so it is in the public domain-prudential, which is about off-market swaps, has produced about 1 billion through the immediate case and the 30 or so following cases. The analysis you have given, which I have not made for myself, so I cannot really comment on now, is not right, in terms of the money that has flowed from some of those cases. Melanie Dawes: Can I add, Mr Norman, that on corporation tax, we also have a lot of other cases with large businesses that are following on from some of those cases? On VAT, it is more usual to find that each case has to be heard on its own merit, so you will find that there are often a lot of other companies standing behind what may appear to be quite a small number of cases but actually involves quite a large amount of tax. Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel very strongly about the high penalties being imposed on small business, and the small penalties being imposed on large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages being charged in penalties and, of course, when you have a negotiated settlement, almost by definition there is no standard compared to which you can charge penalties, which build in a bias in favour of large companies, who can negotiate their terms of settlement, and against small companies. However, the Revenue is occasionally successful in these cases, and here is an example: Prudential had a scheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, there was no penalty charged at all, as far as I am aware, but there are countless cases-every constituency has them-involving small businesses in which HMRC is relentless in chasing large penalties on small business. I am just wondering why you are not charging penalties in cases like Prudential s. In 2008, you told the House that penalties from large businesses would increase, but in fact they have gone down, haven t they? Dave Hartnett: Yes, they have. Q711. Jesse Norman: Why should that be? That seems to me a pretty poor outcome. Dave Hartnett: We did touch on this at the last hearing. Jesse Norman: Let us talk about Prudential then. We do not need to expand on the point; I have made the point about the drop in paying penalties. Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that I know Mr Clasper wanted to make-i cannot remember whether he made it-is that evasion in large business,

117 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 93 or dishonesty in relation to taxation, is something that we do not see very often; I certainly made the point first. In order to take a penalty from large business, we have to find that the law can be applied. With smaller business, there is more often dishonesty, or- Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with you with a bunch of numbers that they just want to get away with, and you make your way to a negotiation, it is hard to prove dishonesty, although they may have started miles away from where you were, in terms of negotiation. Dave Hartnett: We do search out for dishonesty and our investigators are very good at it. Over the years, we have often asked our criminal investigators and other specialist investigators to take up an inquiry into big business avoidance and search out the dishonesty. Q712. Jesse Norman: The Prudential case is a counter-example to that. I have here a copy of the legal report: HMRC win on mis-labelling (Tax newsflash, June 2009). It says that the Court of Appeal affirmed the judgment on the Prudential issue in favour of HMRC. You win the case; where is the money? They should pay the penalty. The Court of Appeal has found for you in this. It seems cut and dried that penalties should be paid. These people have attempted to get away with not paying, and they have been found out. Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appeal is not enough for us to be able to take a penalty. Q713. Jesse Norman: Is that because you fear that it may go to the Supreme Court, or is it because you simply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basis for charging a penalty? Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itself enough to bring the case within the legislation that leads us to be able to charge a penalty. Jesse Norman: I would be very grateful if you could have someone write to the Committee on that. It seems to be an extraordinary thing It would be recalled that HMRC s non-executive Chairman, Mr Clasper, provided the following supporting evidence during the hearing on 16 th March 2011: Q263. On the discussion around avoidance versus evasion, I want to make a point about evasion in the context of large businesses. I can make this point because I sat as a director of two plcs in the FTSE 100, and was chairman of the audit and risk committee of one of them until the end of Evasion, which implies dishonesty and fraud, is a massive issue for a business. If you are caught with fraud and evasion, it is not about fines and so forth. Everybody on the board is probably in the position of losing their job and the company will go down. There is obviously going to be some case somewhere in the world where this is not true, but companies will not evade. What they will do is construct their affairs in a certain way that they think legally reduces the amount of tax. Our challenge is, first of all, to block some of those ways by things like disclosure regimes and so on, and then, secondly, when they interpret what they have done as legally meaning that they do not have to pay the tax, challenging that interpretation and getting the money in. There is this thought that it is laughable that companies will not evade tax, but the issue is they will not commit fraud because of the consequences Mr Clasper joined HMRC on 1 st August 2008 from Terra Firma Capital Partners Ltd where he was Operational Managing Director, and was formally Chief Executive at BAA plc. Similarly, the remaining four members of HMRC s Non-Executive Directors (described officially as senior business figures from outside the department who bring a diverse mix of expertise and skills from across both public and private sector that HMRC looks to... to: bring guidance and advice, support and challenge management about the department s strategic direction, and provide support in monitoring and reviewing progress ) have similar backgrounds in large companies, and comprise a former Chief Information Officer of Tesco, a former Group Human Resources Director of ITV, a former Group Finance Director of HBOS plc and Chairman of Insight Investment, and a previous Managing Director of Business Banking of Lloyds TSB and Chief Executive of Lloyds TSB Scotland The union that represents senior managers and professionals in HMRC appears to detect a Departmental bias in favour of big businesses and high net worth individuals. On 16 June 2011, Mr Graham Black, President of the Association of Revenue and Customs (ARC) issued this statement: HMRC is reducing by a further 15% to around half the size it was a few years ago. And while some extra resources are being used, rightly, to target fraud, the number of senior staff capable of dealing with complex avoidance and evasion will tumble yet further, by over 400. There is a huge tax gap, caused in part by well-advised businesses and individuals stepping aside from taking their share of the pain. Why should banks and major businesses be let off the hook, when most citizens in the UK pay their fair share in taxation? Refusal by the National Audit Office to Investigate 2.57 On 7 March 2011 I reported the matter to the C&AG, the Chair of the PAC and the Chairman of the TSC. A copy of the letter which was sent by is set out in full for ease of reference:

118 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 94 Committee of Public Accounts: Evidence Mr Amyas Morse The Comptroller and Auditor General [email protected] Rt Hon Margaret Hodge Chair, Public Accounts Committee [email protected] Andrew Tyrie MP Chair of the Treasury Committee [email protected] Dear Sirs and Madam, RE: PUBLIC INTEREST DISCLOSURE ACT 1998 Until very recently, I worked as a lawyer in the Personal Tax Litigation team in HMRC s Solicitor s Office, which deals with appeals before the Tax Tribunals and the Courts on various revenue matters including schemes used by multinational companies to pay bonuses to high net worth employees while seeking to avoid Pay As You Earn (PAYE) and National Insurance Contributions (NICs). I presently work in the Criminal and Information Law Advisory team, which provides support and legal advice to policy directorates and operational case teams on matters arising from the Freedom of Information Act 2000, the Data Protection Act 1998, the confidentiality and disclosure provisions in the Commissioners for Revenue and Customs Act 2005, the security of information and HMRC s obligations as a data controller. Information about the internal administrative arrangements of HMRC indicates that at about the same period during which HMRC s Chief Executive and Permanent Secretary, Dame Lesley Strathie, told the Public Accounts Committee (in relation to Vodafone) that it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private, said Permanent Secretary for Tax, Mr Dave Hartnett, did a deal in private with another multinational company. It will be recalled that on 16 November 2010, the following exchange took place between Dame Lesley Strathie and the MP for South Norfolk before the Public Accounts Committee: Q203. Mr Bacon: Dame Lesley... Your litigation and settlement strategy is clear on that. Where you have a strong case you should seek full value from the settlement or take the matter to litigation. Where you have disputes that are of an all-or-nothing character that is to say, it is merely a question of whether the law applies or not such disputes should be settled on all-or-nothing terms. It goes on to say, Do not split the difference or offer any discount for an agreement not to litigate. Your own controlled foreign corporation specialists believed in the case of Vodafone that the absolute minimum that HMRC should settle for was 2.4 billion. You have referred a number of times to the issue of process. The process that concerns me and may concern others is that, instead of the HMRC s specialist in controlled foreign corporation law being consulted on the terms of a deal, it is done in private between your permanent secretary for tax, Mr Hartnett, and the company concerned in this case, Vodafone without the proper checks and balances that you would expect to see, or to ensure that the right advice from within HMRC, from those who knew about the details of controlled foreign corporation law was taken. That is the problem. Dame Lesley Strathie: I don t confirm any of that, Mr Bacon. I think it is quite important and I don t believe that any decision was taken in private. There comes a point when the commissioners have to decide what the right course of action is in the circumstances that they are in. The director general for business tax was the accountable commissioner in the first instance here, and the business tax senior management team. The permanent secretary for tax is the second commissioner. Then we have counsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private. The Public Accounts Committee s Report states (at paragraph 20) that: The Department s Litigation and Settlement Strategy states that, where its legal advice is strong, it should not accept settlements for less than 100% of the tax and interest due. The Department maintains that it does set out to prove the tax liability, serve its assessment and then collect what is due. The Department told us that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice. On 8 December 2010, a meeting took place in HMRC s Solicitor s Office, the note of which is as follows: Present: Anthony Inglese CB (General Counsel and Solicitor to HMRC) Director, Solicitor s Office Team Leader, Solicitor s Office Case Lawyer, Solicitor s Office The meeting began with Mr Inglese reading Case Lawyer s of 6/12 and the advice provided by Leading Counsel for HMRC in the matter in July Director explained that at the High Risk Corporates committee meeting the previous week a late submission had come in about a deal on which Mr Dave Hartnett had shaken hands with the Taxpayer Company. The status of this agreement was not clear.

119 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 95 A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal might be protected, the interest might not. Case Lawyer said this was not correct; it was all covered, per his note. It was not clear whether Mr Hartnett had settled on [x] or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation Strategy. A particular concern was the 200[x] ExCom settlements with all the other scheme users. Mr Inglese asked if there was a risk of that being re-opened. Case Lawyer/Team Leader saying that whilst we would need to see the settlement paperwork, there would appear to have been a commercial deal, with consideration passing, so this seemed very unlikely to be a problem. It was however, clear that the proposed settlement gave the Taxpayer Company no additional penalty for having resisted for [x] more years, including as Case Lawyer explained raking every conceivable point in the Tribunal, and putting up a stooge witness when [the Taxpayer Company s Managing Director] was the obvious person to answer questions. The advice provided by Leading Counsel for HMRC in the appeal was broadly positive both on whether [HMRC] had the right Taxpayer Company and in relation to the scheme. Team Leader was asked to find out more about what the 200[x] settlements said about interest from SI [Specialist Investigations], but only if this took only a day. Taxpayer Company had apparently suggested the principal might be [x]. Discussing whether this altered things. Case Lawyer pointed out that the Claim Form and probably the Particulars of Claim in the County Court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. Mr Inglese said that he would always want to assist Mr Hartnett, but not if this were unconscionable. He referred to the difficulty all those present at this meeting were having justifying a settlement without an interest element. Case Lawyer handed Director complete Excel spreadsheet of the sums claimed, obtained from SI. As you will no doubt be aware, the Public Accounts Committee Report also contains the following conclusion and recommendation: 10. There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While we recognise the Department s obligation to ensure taxpayer confidentiality, the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed. We look to the Department to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes. HMRC s obligation to ensure taxpayer confidentiality, as provided in section 18(1) of the Commissioners for Revenue and Customs Act 2005 is, by virtue of subsection (3) of that section, subject to any other enactment permitting disclosure. Such enactment can impose obligations on HMRC to disclose information for specified purposes. A familiar example is section 8 of the National Audit Act 1983, which enables the National Audit Office (NAO) to require all documents reasonably required for carrying out an examination under sections 6 and 7 of that Act and to require information from any person holding such documents. It is my considered opinion that the public interest will be better served by the invocation of section 8 of the National Audit Act 1983 (whether as part of the NAO s ongoing inquiry into the way HMRC settles tax disputes with major corporate taxpayers or otherwise) with a view to determining whether the settlement reached on the matter referred to above complied with: (a) the statutory obligations of the Commissioners and officers of HMRC under the Commissioners for Revenue and Customs Act 2005; (b) the assurances given to the Public Accounts Committee by Dame Leslie Strathie and other officials; (c) HMRC s published Anti-Avoidance Strategy; (d) HMRC s published Litigation and Settlement Strategy; and (e) All other relevant legal obligations. Yours faithfully, Osita Mba cc: Mr Richard Bacon MP Public Accounts Committee [email protected] Mr Chuka Umunna MP Treasury Committee [email protected] 2.58 On 25 March 2010, I received a letter from Mr Paul Keane of the NAO. It stated as follows:

120 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 96 Committee of Public Accounts: Evidence Thank you for your of 7 March. You raise concerns about the way in which HM Revenue and Customs (HMRC) settled a tax dispute with a multinational company. As Director responsible for the NAO s work on this area, the Comptroller and Auditor General (C&AG) as head of the National Audit Office, has asked me to respond to your on his behalf. We are currently carrying out a review of HMRC s procedures for resolving tax disputes. The work is part of the C&AG s annual examination of tax and duties systems conducted under section 2 of the Exchequer and Audit Departments Act We expect to publish the results as part of the C&AG s Report on HM Revenue and Customs Accounts; this is likely to be in mid-july. As part of our review, we will be examining a sample of tax disputes that have been settled in the past five years. We will be assessing whether the processes followed in these cases complied with relevant legislation and with extant HMRC processes including, where relevant, the Litigation and Settlement Strategy. The case you mention will not necessarily be one of those that we examine, but we intend to study the issues you raise in the cases that we do examine. Thank you again for bringing this matter to our attention Since the cases provided to the NAO by HMRC for the purposes of the review before my letter to the C&AG were limited to those with more than 100 million tax/nic at risk and so should not have included the Goldman Sachs case, I considered that Mr Keane had made short shrift of the public interest disclosure. Therefore, on 23 rd May 2011, I wrote again to the C&AG, pointing out that the settlement appears to disclose potential criminal offences such as fraud by abuse of office, misconduct in public office and cheating the Revenue in addition to other potential breaches of the law and referred specifically to the C&AG s legal obligations under the PIDA 1998 to examine disclosures relating to the proper conduct of public business, fraud, value for money and corruption in relation to the activities of HMRC The letter which was sent by registered post is also set out in full for ease of reference: Mr Amyas Morse The Comptroller and Auditor General National Audit Office Buckingham Palace Road London SW1W 9SP Dear Mr Morse, RE: PUBLIC INTEREST DISCLOSURE ACT 1998 HM REVENUE & CUSTOMS PROCEDURES FOR SETTLING TAX DISPUTES CONFIDENTIAL 1. I respectfully present my compliment to the Comptroller and Auditor General ( C&AG ) and humbly request that consideration be given to providing the following assistance. Background 2. On 7 March 2011, I made a disclosure under the Public Interest Disclosure Act 1998 ( PIDA 1998 Act) to the C&AC to the effect that: Information about the internal administrative arrangements of HMRC indicates that at about the same period during which HMRC s Chief Executive and Permanent Secretary, Dame Lesley Strathie, told the Public Accounts Committee (in relation to Vodafone) that it would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private, said Permanent Secretary for Tax, Mr Dave Hartnett, did a deal in private with another multinational company. 3. The public interest disclosure (a copy of which is enclosed herewith) was made in the reasonable belief that the information disclosed tends to show one or more of the following situations identified in section 43B of the PIDA 1998: (a) That a criminal offence or criminal offences (fraud by abuse of office see section 4 of the Fraud Act 2006 and/or misconduct in public office see Attorney General s Reference No. 3 of 2003 [2004] EWCA Crim 868; and/or cheating the public revenue (see R v Less, The Times, 30 March 1993) has or have been committed, is or are being committed or is or are likely to be committed. (b) That top officials of HMRC have failed, are failing or are likely to fail to comply with HMRC s statutory functions of collection and management of revenue (taxes, duties and national insurance contributions) as required by section 5 of the Commissioners for Revenue and Customs Act (See Inland Revenue Commissioners v National Federation of Self-Employed and Small Businesses Ltd [1981] STC 260 at 269 (Lord Diplock): In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection.... [H]owever... if it were established that the Board were proposing to exercise or to refrain from exercising their powers not for reasons of good management but for some extraneous or ulterior reason that action or inaction of the Board would be ultra vires.) (c) That top officials of HMRC have failed, are failing or are likely to fail to comply with the United Kingdom s obligations under Article 107 of the Treaty on the Functioning of the European Union,

121 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 97 which prohibits State aid ie an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. (See paragraph 21 of Commission notice on the application of the State aid rules to measures relating to direct business taxation (98/C 384/03): The discretionary practices of some tax authorities may also give rise to measures that are caught by Article [107]. The Court of Justice acknowledges that treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria Case C-241/94 France v. Commission (Kimberly Clark Sopalin) [1996] ECR I-4551.) (d) That top officials of HMRC have failed, are failing or are likely to fail to comply with assurances given to the Public Accounts Committee in November last year that the final decision on how to resolve each tax dispute has to be taken by two Commissioners and must involve legal advice. (e) That top officials of HMRC have failed, are failing or are likely to fail to comply with HMRC s self-imposed administrative duties under their published Litigation and Settlement Strategy and Anti-Avoidance Strategy. (f) That information tending to show any matter falling within any one of the preceding paragraphs has been, is being, or is likely to be deliberately concealed. 4. In a letter dated 25 March 2010 (a copy of which is enclosed herewith) Mr Paul Keane, responding on behalf of the C&AG, stated: We are currently carrying out a review of HMRC s procedures for resolving tax disputes. The work is part of the C&AG s annual examination of tax and duties systems conducted under section 2 of the Exchequer and Audit Departments Act As part of our review, we will be examining a sample of tax disputes that have been settled in the past five years. We will be assessing whether the processes followed in these cases complied with relevant legislation and with extant HMRC processes including, where relevant, the Litigation and Settlement Strategy. The case you mention will not necessarily be one of those that we examine, but we intend to study the issues you raise in the cases that we do examine. 5. My disclosure to the C&AG did not reveal vital details such as the identity of the taxpayer company and the amount of national insurance contributions at stake. It is not clear from Mr Keane s letter whether he already had these details or whether he considered them irrelevant to his decision. The Role of the C&AG as a Prescribed Person under the PIDA The C&AG is a prescribed person under the PIDA 1998 (by virtue of the Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2003) to whom external disclosures can be made relating to: the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services. 7. Therefore, the primary issue in this matter is the nature and extent of the C&AG s role under the PIDA 1998 in deciding whether or not to investigate a public interest disclosure he receives. 8. The NAO s whistleblower webpage states that the C&AG has a discretion in the matter: The Act does not require the C&AG to investigate every disclosure he receives; his decision whether or not to investigate is based upon various criteria designed to ensure the most effective use of the resources at his disposal in safeguarding the public interest. 9. Mr Keane did not specify whether his decision was based on the PIDA 1998 or whether the various criteria designed to ensure the most effective use of the resources at [the C&AG s] disposal in safeguarding the public interest upon which a decision whether or not to investigate a disclosure received under that legislation were taken into account. Just like the NAO s webpage, Mr Keane s letter did not disclose what these criteria are. 10. Parliament must have conferred the C&AG with the discretion under the PIDA 1998 with the intention that the C&AG should use it to promote the policy and objects of the legislation. Thus a decision whether or not to investigate a disclosure that fails to promote the purpose of the PIDA 1998 may be tainted by illegality on public law grounds. 11. In Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, Lord Diplock (while expounding the classic grounds for the judicial review of administrative decision) stated (at 410): By illegality as a ground for judicial review I mean that the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it. 12. The NAO s website explains the purpose of the PIDA 1998 in these terms: The Act was introduced in response to the major corporate failures of the 1980s and 1990s, where workers had known of the dangers that led to disaster, but were unwilling or unable to warn of them effectively. It aims to help prevent such disasters and corporate malpractice in general by encouraging workers with relevant information to come forward responsibly.

122 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 98 Committee of Public Accounts: Evidence The Act seeks to achieve this by offering a right to redress in the event of victimisation if workers raise their concerns in the ways specified in the legislation. It is also hoped that the Act will promote a change in culture amongst employers, and encourage them to establish procedures to receive disclosures in good faith and act on them appropriately. 13. The need to establish procedures to receive disclosures in good faith and act on them appropriately applies also to regulators (such as the C&AG) who are authorised by the PIDA 1998 to receive public interest disclosures. This is evident from the comments of the Nolan Committee (Committee on Standards in Public Life Second Report, Cm (May 1996) p. 21) which was said during the Parliamentary Debates (Hansard HL 11 May 1998, Lord Borrie QC, col. 889) on the PIDA 1998 to best summarise the purpose of the Act: All organisations face the risks of things going wrong or of unknowingly harbouring malpractice. Part of the duty of identifying such a situation and taking remedial action may lie with the regulatory or funding body. But the regulator is usually in the role of detective, determining responsibility after the crime has been discovered. Encouraging a culture of openness within an organisation will help: prevention is better than cure. Yet it is striking that in the few cases where things have gone badly wrong in local public spending bodies, it has frequently been the tip-off to the press or the local Member of Parliament sometimes anonymous, sometimes not which has prompted the regulators into action. Placing staff in a position where they feel driven to approach the media to ventilate concerns is unsatisfactory both for the staff member and the organisation. 14. The NAO s whistleblowing webpage states that the C&AG s receipt of disclosures relating to the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services under the PIDA 1998 is consistent with his position as the external auditor for the central government sector. Therefore, the legislation that governs the C&AG s role as the auditor for the central government sector is relevant to the C&AG s legal obligations as a prescribed person under the PIDA Section 6 of the National Audit Act 1983 ( NAA 1983 ) authorises the C&AG to carry out an examination into the economy, efficiency and effectiveness with which HMRC (or any other Government department) have used their resources in discharging their functions (the so-called value for money study). Section 8 of the NAA 1983 Act gives the C&AG a right of access at all reasonable times to all such documents and information as the C&AG may reasonably require for carrying out this examination. 16. More significantly for the purposes of this matter, section 2 of the Exchequer and Audit Departments Act 1921 ( E&ADA 1921 ), referred to in Mr Keane s letter, provides as follows: (1) The accounts of the receipt of revenue by [HMRC], and the accounts of every receiver of money which is by law payable into the Exchequer, shall be examined by the Comptroller and Auditor General on behalf of the House of Commons in order to ascertain that adequate regulations and procedure have been framed to secure an effective check on the assessment, collection, and proper allocation of revenue, and the Comptroller and Auditor General shall satisfy himself that any such regulations and procedure are being duly carried out. (2) The Comptroller and Auditor General shall make such examination as he thinks fit with respect to the correctness of the sums brought to account in respect of such revenue as aforesaid, and shall, together with his report on the resource accounts of the departments concerned, present to the House of Commons a report on the results of any such examination. 17. It is apparent that the statutory power conferred on the C&AG by section 2 of the E&ADA 1921 is wide enough to enable the C&AG to investigate all the specified matters relating to the provision of centrally-funded public services under the PIDA 1998, namely: (a) value for money; (b) the proper conduct of public business; (c) fraud; and (d) corruption. 18. However, the NAO s reports to Parliament on the results of the audits of the financial statements of all central government departments, agencies and other public bodies the expenditure and revenue carried out each year (amounting to some 950 billion across 475 accounts in ) have not been known to address the question of culpability. 19. In fact, the NAO s website indicates that their audits under section 2 of the E&ADA 1921 and the NAA 1983 are focused on value for money (with no specific reference to the proper conduct of public business; fraud; and corruption): Our work programme is focused on three areas that impact on all departments performance in achieving value for money: improving financial management and reporting; making better use of information; and ensuring that services are delivered cost-effectively. 20. In relation to the matter at hand, Mr. Keane s letter appears to repeat information attributed to the NAO in the media when the examination under section 2 of the E&ADA 1921 he referred to in his letter was announced (Lucy Farndon, Probe into the taxman s deals with big business amid claims Vodafone was let off 6bn bill, Daily Mail, 20 January 2011): We are reviewing HMRC s procedures for resolving tax disputes. Given Vodafone and other similar cases, we thought it would be a good idea to look at the procedures by which the settlements are reached.

123 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev But on that occasion it was emphasised that that the NAO would not be auditing particular settlements (see Andrew Goodall, HMRC dispute resolution procedures under scrutiny, Tax Journal, 20 January 2011) but will look at tax settlements generally rather than at specific cases (see Sue Cameron, Taxmen in turmoil as pressure mounts Financial Times, January 18, 2011). 22. Therefore, it is debatable whether this examination (which was given by Mr Keane as justification for his apparent decision not to investigate the matter) is sufficient for the purpose of the PIDA 1998, which requires a consideration of not only value for money but also of the proper conduct of public business, fraud and corruption in relation to the settlement that forms the subject matter of the disclosure. 23. In all the circumstances of this case, it is respectfully suggested that it is not clear that Mr Keane understood correctly the law that regulates his decision-making power and his duty to give effect to it. The Role of the C&AG where a Disclosure is made to Parliament under the PIDA Sections 43G and 43H of the PIDA 1998 permit a public interest disclosure to be made to Parliament. Accordingly, my disclosure to the C&AG was also brought to the attention of the Public Accounts Committee and the Treasury Select Committee. Section 1(2) of the NAA 1983 provides that the G&AG shall by virtue of his office be an officer of the House of Commons. Therefore, it is respectfully suggested that this disclosure to Parliament ought to be a relevant consideration in the C&AG s decision whether or not to investigate the matter. 25. The NAO s website explains the NAO s Support to Parliament in these terms: The National Audit Office (NAO) works on behalf of Parliament and the taxpayer to hold government to account for the use of public money and to help public services improve performance. The relationship with Parliament is central to the roles of the Comptroller and Auditor General (C&AG) and NAO. We look to place our skills at the service of Parliament as a whole, supporting the Public Accounts Committee (PAC), other select committees from both Houses and individual Members in their scrutiny of public expenditure and service delivery. 26. Section 8 of the Government Resources and Accounts Act 2000 provides the C&AG with a right of access to documents and information relating to HMRC s accounts for the purpose of conducting his audit under section 2 of the E&ADA However, this statutory right of direct access to HMRC papers (just like the similar right of access under section 8 of the NAA 1983) does not itself confer a similar right of access on the Parliamentary Committees which the C&AG serves. 27. It was against this background that the Public Accounts Committee concluded recently (Eighteenth Report: HM Revenue and Customs Accounts, paragraph 21) that: The Department did not answer some of our specific questions on tax disputes on the grounds that it has a legal duty not to disclose taxpayer details, except in certain limited circumstances. This applies to all taxpayers, whether they are an individual or a publicly quoted company. This inevitably makes it difficult to obtain assurance that the Department resolves tax disputes appropriately. 28. Therefore, should the Public Accounts Committee or the Treasury Select Committee decide to investigate the subject matter of this disclosure, they may not have access to documents and information that will be readily available to the C&AG. It is significant that the afore-mentioned Report of the Public Accounts Committee contains the following conclusion and recommendation (paragraph 10): There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While we recognise the Department s obligation to ensure taxpayer confidentiality, the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed. We look to the Department to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes. 29. It is not clear from Mr Keane s letter that he took into account the lack of direct access to information and documents on the part of the Parliamentary Committees that have received the disclosure or what may be regarded as the legitimate expectations of Parliament and the taxpayer on such a controversial matter of public interest in arriving at his decision. Indeed, it does appear that Mr Keane s response dated 25 th March 2011 was not copied to the Parliamentary Committees. The assistance required 30. It is respectfully requested that the C&AG review the decision taken on his behalf by Mr Keane in light of the C&AG s statutory authority under the PIDA 1998 to consider public interest disclosures relating to the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrally-funded public services. 31. In thanking the C&AG in advance for his assistance in this matter, I avail myself of this opportunity to renew the assurance of my highest consideration. Osita Mba cc: Rt Hon Margaret Hodge, Chair, Public Accounts Committee, House of Commons, London SW1A 0AA Andrew Tyrie MP, Chair of the Treasury Committee, House of Commons, London SW1A 0AA

124 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 100 Committee of Public Accounts: Evidence Mr Richard Bacon MP, Public Accounts Committee, House of Commons, London SW1A 0AA Mr 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 7 th March and Mr Keane s reply of 25 th March was also sent to the Chair of the PAC 9 and the Chairman of the TSC 10 and a member of each committee The C&AG maintained the stance communicated in Mr Keane s previous letter. His reply dated 30 th June 2011 is as follows: Thank you for your letter of 23 May. You raise concerns as to whether proper consideration has been given to the investigation of the disclosure in your of 7 March under the Public Interest Disclosure Act 1998 (the Act). Your disclosure raised concerns about the way in which HM Revenue and Customs (HMRC) settled a tax dispute with a multinational company. As you note, the Comptroller and Auditor General (C&AG) is prescribed person under section 34F of the Employment Rights Act 1996 (as amended by the Public Interest Disclosure Act 1998), to whom disclosures can be made relating to the proper conduct of public services, value for money, fraud and corruption in relation to the provision of centrally-funded public services (Public Interest Disclosure (Prescribed Persons) (Amendment) Order 2003 (Statutory Instrument 2003 number 1993)). The C&AG s receipt of such disclosures is consistent with his position as the external auditor for the central government sector. The Act does not require the C&AG to investigate every disclosure he receives; his decision whether or not to investigate is based upon various criteria designed to ensure the most effective use of the resources at his disposal in safeguarding the public interest. These criteria include the likely impact of the matter on public funds, including whether the issue is confined to a particular body or whether there is a potential impact across several government bodies. We also consider whether the issue is ongoing or is likely to recur, or whether it relates to a set of circumstances which have passed. Based on these criteria, I can assure you that we have taken on board the concerns raised in your letter as part of our review of HMRC s procedures for resolving tax disputes on which we will be reporting in July as part of the Report on the Department s accounts, as Mr Keane advised in his letter to you of 25 March. FOR REASONS OF TAXPAYER CONFIDENTIALITY, our report will not include details of any named taxpayers. (emphasis supplied) 2.63 A few days earlier, HMRC provided this written evidence to the Treasury Sub-Committee dated 15 th June 2011: 6. Q413: Mr Umunna: Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed? 7. Q415: Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman s settlement? HMRC has carefully considered the extent to which they can answer the questions asked and have concluded that they cannot give any information, FOR REASONS OF TAXPAYER CONFIDENTIALITY. (emphasis supplied) 2.64 The similarity of the expressions by HMRC and NAO may be entirely coincidental but it is notable that the exact phrase was used to justify a wrong contention. Moreover, as explained below, in his report (HM Revenue & Customs Accounts: Report by the Comptroller and Auditor General (7 July 2011), paragraph 2.29) the C&AG acknowledged the public and Parliamentary disquiet surrounding the process but claimed that legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently. Furthermore the C&AG referred to section 18 of the Commissioners for Revenue and Customs Act 2005 (which applies to HMRC) as the authority for this contention rather than to section 182 of Finance Act which applies to the C&AG and the NAO, and which authorises them to disclose relevant information to counter allegations that these cases have been settled inappropriately for a lower yield than might have otherwise been achieved. More significantly, the stated nature and scope of the NAO s examination vindicates my stated concern that the examination may not be sufficient for the purposes of the PIDA. 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 the contents. 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 on his 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 multinational corporations as part of its inquiry into the administration and effectiveness of HMRC. The transparency and accountability 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 issues raised during the inquiry, in a report that will be published towards the end of this month.

125 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 101 Part Three: NAO s Examination of the Exercise of Hmrc s Collection and Management Powers 3.1 As explained above, section 1(3) of the National Audits Act 1983 ( NAA 1983 ) provides that: subject to any duty imposed on him by statute, the Comptroller and Auditor General shall have complete discretion in the discharge of his functions and, in particular, in determining whether to carry out any examination under Part II of this Act and as to the manner in which any such examination is carried out; but in determining whether to carry out any such examination he shall take into account any proposals made by the Committee of Public Accounts. G&AG s Terms of Reference 3.2 However, the C&AG s report explains the nature and scope of his recent examination of HMRC s processes for settling large and complex disputes as follows: 2.4 In November 2010, the Committee of Public Accounts examined the Department on its arrangements for settling tax disputes with large companies. In the light of this, the Comptroller and Auditor General decided to undertake a review of these arrangements. 2.5 Our review considered two questions: Are the Department s processes for resolving tax disputes adequate to secure an effective check on the assessment and collection of tax revenue? Has the Department complied with its processes for resolving tax disputes? 2.6 Our review focused on the Department s processes for resolving tax disputes with the largest companies.... We examined a sample of 27 disputes, to assess whether the Department had complied with statutory requirements and its own processes for resolving disputes. Our review considered whether the Department s processes were adequate to establish a sound position on the amount of tax due; it did not involve coming to an independent judgement on the tax liability in individual cases. (emphasis supplied) 3.3 It is difficult to see how the C&AG could have determined whether the Department had complied with statutory requirements and its own processes for resolving disputes merely by considering whether the Department s processes were adequate to establish a sound position on the amount of tax due, and without coming to an independent judgement on the tax liability in individual cases. Since section 1(3) of NAA 1983 authorises the C&AG to come to an independent judgement on the tax liability in the individual cases he examined, his failure to do so in this instance raises a number of important issues. 3.4 First, it is significant that the C&AG restricted the scope of his examination in this manner despite the public interest disclosure I made to him and his assurances on the matter. It would appear that the C&AG, who is a prescribed person under the PIDA 1998 to whom external disclosures can be made relating to the proper conduct of public business, fraud, value for money and corruption in relation to the provision of centrallyfunded public services, has not investigated the matter I reported to him as required by the PIDA 1998 (the C&AG s discretion under section 1(3) of NAA 1983 being explicitly subject to any duty imposed on him by statute ) and settled principles of public law. As stated above, the 27 cases examined by the NAO were limited to those with more than 100 million tax/nic at risk, which would have excluded the Goldman Sachs settlement. 3.5 Secondly, it is also notable that the C&AG limited the scope of his review despite his statement to the PAC regarding the Vodafone settlement on 16 November It would be recalled that following the Chair s remark (Q194) that their understanding was that HMRC s accounts could be qualified by the National Audit Office if it found that there was a question mark over whether sufficient revenue was collected from Vodafone, the C&AG said this (Q202): Before you pass on, the Chair very kindly paraphrased something that I said quite carefully, qualifiedly, earlier on. Since you said it on the record, Chair, I can t let it go by. What I said was that there might be a case for qualifying on grounds of irregularity if it was seen that a decision had been made unreasonably. I did warn that I thought that that wasn t very likely. I think I am repeating myself fairly accurately. Thank you. 3.6 Similarly, without coming to an independent judgement on the tax liability in individual cases but only considering whether the Department s processes were adequate to establish a sound position on the amount of tax due it is debatable whether the C&AG could have reached an informed decision as to whether there might be a case for qualifying [the Vodafone settlement] on grounds of irregularity or that a decision had been made unreasonably. 3.7 Thirdly, as explained above, the Litigation and Settlement Strategy states that in avoidance cases if our legal advice is strong, do not accept settlement for less than 100% of the tax and interest due. So information on the strength or otherwise of the sample of 27 disputes the NAO examined is critical to any settlement and thereby to any examination of the appropriateness of any settlement. However it is my understanding that the NAO were pushing very hard for detailed information on the cases where [HMRC] made a provision or contingent liability in the trust statement but that Mr Hartnett and Mr Alan Evans (the Solicitor s Officer s senior representative in the High Risk Corporates Programme) were able to convince them to accept less detailed information that did not give any indication as to whether [HMRC] thought [its] case was strong or weak.

126 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 102 Committee of Public Accounts: Evidence 3.8 Yet section 8(1)(a) of Government Resources and Accounts Act 2000 vests the C&AG with a right of access at all reasonable times to any of the documents relating to the department s accounts while section 8(1)(b) imposes a duty on the HMRC to give the C&AG any assistance, information or explanation which he requires in relation to any of those documents. Furthermore, the PAC had specifically asked HMRC to cooperate fully with a National Audit Office review of its procedures for resolving tax disputes. 3.9 It is against this background the C&AG s contention (paragraph 2.33 of his report) that he assessed the extent to which the processes applied by the Department were consistent with: statutory requirements, for example, the provisions for the exercise by the Commissioners of their discretion under their statutory collection and management powers; the Litigation and Settlement Strategy; and internal guidelines on the arrangements for approving settlements, and his conclusion (in paragraph 2.35) that he did not identify any instances where these powers were exercised inappropriately should be considered. C&AG s Explanation of HMRC s Processes for Settling the Largest Disputes 3.10 The C&AG s report sets out the details of the High Risk Corporates Programme (which according to HMRC was established by Mr Hartnett for addressing compliance issues in big business ) as follows: Processes applying to the largest disputes 2.12 The Department has five Commissioners, who have ultimate responsibility for collecting and managing tax revenues. In practice, Commissioners are normally only directly involved in signing off the settlement of the largest tax disputes.... The resolution of most large and complex tax disputes will involve several Directorates, for example, experts in Corporation Tax and accountancy specialists, and also legal and policy advisers where relevant. Each company in the Large Business Service has a Customer Relationship Manager, who is responsible for managing the Department s ongoing relationship with the company across all taxes and duties, and for coordinating all the Department s technical specialists relevant to the company s tax affairs The Department established a High Risk Corporates Programme (the Programme) in 2006, and settlements totalling over 9 billion have been reached with the companies participating in the Programme since it began. At the time, many large companies had multiple, long-unresolved tax disputes, and in some cases were involved in extensive avoidance activity. The Programme was set up to address this situation, with the aims of: reducing avoidance and improving the compliance of the largest businesses; improving the relationship between the Department and the businesses; and establishing and collecting the right amount of tax The High Risk Corporates Programme involves an intensive process for resolving the participating company s issues. The approach includes Board-to-Board, or other high level, engagement between the Department and the company with a commitment from both sides to apply high levels of resource to providing information and resolving issues within an accelerated timeframe. In addition, the Department seeks agreement from the Board of a company within the Programme that it will in future work more constructively with the Department The Director General for Business Tax has overall accountability for the Programme and the Director, Large Business Service is the Programme s owner. There is a Programme Board, responsible for agreeing which companies will be admitted to the Programme (based on factors such as the size, age and wider application of the issues under consideration), endorsing proposed settlements, and for the priorities, development and governance of the Programme. The Programme Board is chaired by the Director, Large Business Service and its membership includes the Directors of VAT; Corporation Tax, International and Anti-Avoidance; and Special Investigations and representatives from the Solicitor s Office. Each case has an Enquiry Coordinator, whose responsibilities include bringing together the work of the Customer Relationship Manager and all the Department s technical specialists, policy advisers, caseworkers, consultants and solicitors that have an interest in the case For disputes dealt with outside the Programme, the Customer Relationship Manager is initially responsible for bringing together the relevant specialists in resolving tax issues. The Department encourages these parties to reach consensus on how the issue should be resolved but, if they cannot agree, then the issue is escalated to the relevant Directors for a decision There are defined procedures for signing off settlements for cases within and outside of the Programme. For cases outside the Programme where the tax under consideration is less than 100 million, agreement must be reached between the relevant stakeholders. Since November 2009, cases must be referred to the Programme Board before settlement where the tax under consideration exceeds 100 million, and there is a proposal for the Department to concede one issue or more, or to accept less than 100% of the total tax under consideration, or where the case and issues are particularly sensitive.

127 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 103 C&AG s Findings 3.11 The C&AG s report then highlights the Shortcomings in current processes in these terms: 2.28 In four of the largest settlements we examined, the Department operated specific governance arrangements. The Department considered each of these cases to involve a single issue, with a range of possible outcomes for the tax due, rather than being the all or nothing cases normally dealt with by the Programme Board. The arrangements involved reducing the size of the team dealing with the case, and sign off by Commissioners without a prior reference to the Programme Board. In each case, the team included the relevant Director, supported by Deputy Directors, and Commissioners were involved. These arrangements meant that decisions were taken at the most senior level, and relevant technical and legal expertise remained available. The Department s view is that the Programme Board would not have added value to the decision-making process in these particular cases given the involvement of senior staff, including the Commissioners and members of the Programme Board, and relevant internal and external experts In two of the four cases, one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so. Where Commissioners are directly involved in negotiating settlements, particularly where the Programme Board is not used, there is less independent oversight of settlements to provide assurance, internally and externally, that these have been reached on an appropriate basis. The Department has attracted criticism from Parliament and its own staff because of the absence of adequate separation between the analysis, negotiation and approval processes for major tax settlements. The complexities of the issues in these cases make it more difficult to demonstrate that an appropriate tax liability has been assessed and legal restraints over taxpayer confidentiality mean that the details of these cases cannot be released subsequently. [Commissioners for Revenue and Customs Act 2005, Section 18.] 2.30 We found cases where large companies wanted early engagement with a Commissioner to secure an authoritative view of the Department s position. The Department s strategy for board level engagement with large business means that contact between Commissioners and business leaders on specific and general issues will continue to be a feature of its approach. The Department believes that a degree of Commissioner involvement in resolving some tax disputes is inevitable. However, the Department recognises that it needs to build its capacity to negotiate settlements on major cases in staff below Commissioner level. This should help to reduce the frequency of taxpayers requesting the involvement of Commissioners on specific issues as settlement discussions are continuing There is currently a difference between the criteria for referral of decisions to the Programme Board and those for referral to Commissioners. The threshold for referral to the Programme Board is based on the total value of a settlement with a taxpayer, which usually covers more than one issue. The threshold for a referral to Commissioners is, however, based on the value of individual issues. We found a settlement worth more than 400 million, with issues totalling over 400 million conceded by the Department because it considered its position was weak, which was not referred to Commissioners because no single issue exceeded 250 million The Department has a clearly defined approach to settling disputes, as set out in the Litigation and Settlement Strategy. An internal review of the Litigation and Settlement Strategy in December 2009 found that, when it was launched in May 2007, the extent to which it was understood by the Department s staff varied. Some staff did not appreciate the flexibility it offered, or thought it emphasised litigation. This initially led to delays in some cases, and inconsistent application, creating an adversarial relationship with some taxpayers. The Department does not currently intend to revise the substance of its Litigation and Settlement Strategy as its core message does not need to change, but is planning to relaunch the Strategy to make the messages clearer. This should assist in developing a common understanding within the Department on how to apply the Strategy in the resolution of tax disputes These findings appear to contradict this written evidence submitted by HMRC to the Treasury Sub- Committee dated 15 June 2011: Q402: Mr Ruffley: The person or persons who decide finally to settle, when to settle and at what quantum to settle: who are they, what grades of officials are they? All cases within the Programme are overseen by the High Risk Corporates Programme Board which is responsible for selecting suitable cases and for monitoring progress. It is the Programme Board which takes all the important decisions on individual tax issues and decides how cases are settled, unless the case is so large or sensitive that the matter has to be referred to the Commissioners for a final decision. In this case, the Programme Board will usually make a recommendation to the Commissioners. The Programme Board is a very senior body chaired by the Director of the Large Business Service. All of the business areas of HMRC that have an interest in the cases are represented at Director or Deputy Director level. HMRC s Solicitors Office is also represented on the Programme Board The findings are also inconsistent with the oral evidence given to the PAC by HMRC s Chief Executive and other senior officials on 16 th November 2010.

128 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 104 Committee of Public Accounts: Evidence 3.14 It is important to note the similarities between the shortcomings highlighted in the C&AG s Report (particularly the four cases referred to in paragraphs 2.28 and 2.29) and the Goldman Sachs settlement. These similarities can be illustrated further by considering the membership of the Programme Board, which provides the formal means for participation by lawyers, technical specialists, policy advisers, caseworkers that have an interest in the case in any settlement. In fact the written evidence 15 June 2011 stated that current membership of the Programme Board comprises: Director, Large Business Service, SCS2 Director, Specialist Investigations, SCS2 Director, Corporation Tax, International, Anti-Avoidance, SCS2 Director, Solicitor s Office, SCS2 HRCP Programme Team Leader, Large Business Service, SCS1 Deputy Director, Charities, Assets and Residence, SCS1 Deputy Director, Specialist Investigations, SCS1 Senior Tax Specialist, Corporation Tax, International, Anti-Avoidance, SCS1 Head of Anti-Avoidance Group, SCS1 HRCP Team Head, Solicitor s Office, SCS1 Deputy Director, Local Compliance, Large and Complex, SCS With specific reference to legal advice and governance, any settlement that is not referred to the Programme Board is not likely to benefit from the advice and governance that are supposed to be provided by the two senior representatives of the Solicitor s Office in the Board. Indeed it was the Director, Solicitor s Office, Mr Alan Evans, that was quoted as saying at the meeting in Solicitor s Office on 10 th December 2010 that at the High Risk Corporates Board meeting the previous week a late submission had come in about a deal on which Mr Dave Hartnett had shaken hands with Goldman Sachs and that the status of this agreement was not clear It is against this background that the C&AG s Report should properly be considered. The report disclosed that: in two of the four cases, one of the Commissioners approving the settlements had participated in the negotiations and, in another case, both Commissioners had done so. The implication of this could be that in two of the four cases, one of the Commissioners approving the settlements had negotiated the settlement with the taxpayer company without the involvement of HMRC s legal and technical experts and then signed it off with another Commissioners; and that in the other case, both Commissioners had negotiated the settlement with the taxpayer company without the involvement of HMRC s legal and technical experts and then signed it off between themselves Although the C&AG reported that: these arrangements meant that decisions were taken at the most senior level, and relevant technical and legal expertise remained available, as can be seen from the Goldman Sachs settlement, relevant technical and legal expertise being available does not necessarily mean that the Commissioner(s) negotiating the settlement obtained it at the appropriate time, or at all. Indeed, the mere fact that HMRC employs about 250 lawyers and many more technical specialists means that relevant technical and legal expertise remains available at any point in time. The question is whether relevant technical and legal expertise was obtained. It was not obtained in the Goldman Sachs settlement It is significant that the C&AG has not stated explicitly in his report that it was obtained in these four biggest cases that were not referred to the Programme Board, which presumably includes the Vodafone settlement on which he expressed an opinion at a hearing before the PAC Therefore, it may be helpful to revisit the following evidence given to the TSC by Mr Hartnett on 16 March 2011, regarding Vodafone: Q154. Jesse Norman: Is there anything you want to add? Dave Hartnett:... I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout.... Q158. Jesse Norman:... Can you tell us how the case was settled? What was the procedure by which you settled the case? Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone. Q159. Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for. Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can.... Q162. Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind? Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, two commissioners of HMRC. Q163. Jesse Norman: Are they board members?

129 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 105 Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well. C&AG s Conclusions 3.20 The C&AG s report addressed the question: Has the Department complied with its processes for resolving tax disputes? as follows: 2.33 We examined 27 settlements, involving 21 companies and assessed the extent to which the processes applied by the Department were consistent with: statutory requirements, for example, the provisions for the exercise by the Commissioners of their discretion under their statutory collection and management powers. [The Commissioners have a limited discretion with regard to their duty for the collection and management of taxes under Section 5 of the Commissioners for Revenue and Customs Act In certain limited circumstances, they can forego the collection of tax, for example if there is a higher net return from not collecting the tax. The judgement in Wilkinson-v- Commissioners of Inland Revenue in the House of Lords 2005 set out the limits of the circumstances in which the collection of tax could be foregone.] the Litigation and Settlement Strategy; and internal guidelines on the arrangements for approving settlements Fifteen of the settlements we examined were in the High Risk Corporates Programme, and a further three [Four of the cases not referred to the Programme Board for a decision were those subject to the special governance arrangements noted in paragraph 2.28.] were presented to the Programme Board for a decision. The settlements involved between one and 236 issues, with values (which totalled 8.8 billion) ranging from some 70 million to more than 1 billion. In selecting settlements to examine, we aimed to select the largest issues by value, irrespective of the type of tax involved. We selected our sample to include issues where a large amount of tax was under consideration, even if the final settlement value was small. We selected a sample of cases settled since April 2006 meeting one or more of the following criteria: Settlements reached by companies in the Programme. Other settlements considered by the Programme Board. Settlements where the issues involved the tax under consideration of more than 250 million, whether the company was in the Programme or not. Any settlements where we were made aware of specific concerns about the governance of the dispute resolution. Collection and management powers 2.35 Our review identified a number of cases where the Commissioners had been asked to exercise powers available to them under Section 5 of the Commissioners for Revenue and Customs Act 2005 to forego the collection of tax. We did not identify any instances where these powers were exercised inappropriately. We noted, however, some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners ability to exercise these powers to resolve tax disputes. If the Commissioners apply powers inappropriately, they may face a Judicial Review of their decision In one case, we identified that Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department s Solicitor s Office. In our view, in the particular circumstances of this case, it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail. Adherence to the Litigation and Settlement Strategy and guidelines for approving settlements 2.37 We found that the Department had complied with the requirements of the Strategy and with internal guidelines for managing cases in a substantial majority of the cases we examined. Technical and legal expertise was sought and received as appropriate and the available documentation indicated that individual issues had been considered on their merits. We did, however, note exceptions in the following cases which were referred to the Programme Board as the tax under consideration exceeded 100 million: A case was settled before the Department recognised that it should have been referred to the Programme Board. The Board identified a financial error, demonstrating its value as a check on settlement proposals. A case where the Department came under pressure from a company to agree a settlement on a single issue very quickly. The Department judged that it should not wait until the next monthly Programme Board meeting, so the proposed settlement was put to the Programme Board by and Board members were given a week to respond. The settlement proposal was agreed even though not all Board members responded by the deadline The High Risk Corporates Programme approach assists in resolving long outstanding issues within an accelerated timeframe. However, there is a risk that the pressure to reach resolution quickly will be at the expense of considering issues properly. There is also a risk that, in settling a range of issues in a short timeframe, weaker issues will be dropped in the wider interest of obtaining a settlement, where they might have been pursued if considered in isolation. We have seen examples where the Programme Board has

130 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 106 Committee of Public Accounts: Evidence agreed not to pursue issues involving finely balanced arguments. Whilst this is consistent with the Litigation and Settlement Strategy, the Department accepts that it could be more explicit in describing the criteria used to make marginal decisions. Case Law on the Commissioners Discretion as to the Best Means of Collecting the Highest Net Return of Taxes and Duties 3.21 The scope of the Commissioners powers under section 5 of the CRCA 2005 (then under section 1 of the Taxes Management Act 1970 and section 1 of the Inland Revenue Regulation Act 1890) was directly in issue in Commissioners of Inland Revenue v National Federation of Self-Employed and Small Businesses Ltd (1981) 55 TC 133 (the Fleet Street Casuals case). The Commissioners had been concerned at tax evasion to the tune of some 1 million a year by casual workers employed in Fleet Street, a substantial number of whom had been drawing their pay under false names such as Mickie Mouse of Sunset Boulevard and Sir Gordon Richards of Tattenham Corner. The Commissioners then made an agreement with the employers and the unions in March 1979, which would enable them to collect tax in the future. However, in achieving this, they agreed that they would not attempt to pursue those who had evaded taxes in the past. The Federation sought to challenge this concession and the principal issue was whether it had standing to do so. It was relevant, however, to consider the strength of the case that the Commissioners acted beyond their powers Lord Diplock summarised the nature and scope of the Commissioners powers in this oft-quoted statement (at pages ): [T]he Board are charged by statute with the care, management and collection on behalf of the Crown of income tax, corporation tax and capital gains tax. In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection. The Board and the inspectors and collectors who act under their directions are under a statutory duty of confidentiality with respect to information about individual taxpayers affairs that has been obtained in the course of their duties in making assessments and collecting the taxes; and this imposes a limitation on their managerial discretion. I do not doubt, however, and I do not understand any of your Lordships to doubt, that if it were established that the Board were proposing to exercise or to refrain from exercising its powers not for reasons of good management but for some extraneous or ulterior reason, that action or inaction of the Board would be ultra vires and would be a proper matter for judicial review if it were brought to the attention of the court by an applicant with a sufficient interest in having the Board compelled to observe the law The subsequent case of Wilkinson v. Commissioners of Inland Revenue (2005) 77 TC 78 concerned a different exercise of the Commissioners collection and management powers known as Extra-Statutory Concessions (ECS). The introductory words of the published ESCs highlight the various differences: An extra-statutory concession is a relaxation which gives taxpayers a reduction in tax liability to which they would not be entitled under the strict letter of the law. Most concessions are made to deal with what are, on the whole, minor or transitory anomalies under the legislation and to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter. The concessions described within are of general application, but it must be borne in mind that in a particular case there may be special circumstances which will need to be taken into account in considering the application of the concession. A concession will not be given in any case where an attempt is made to use it for tax avoidance Despite this difference between ESCs (which are published and available to any qualifying member of the general body of taxpayers) and a private negotiated settlement (such as the one in the Fleet Street Casuals case and in the cases examined by the C&AG), both the Court of Appeal and the House of Lords endorsed the principle set out by Lord Diplock. In the Court of Appeal, Lord Phillips said this (at pages 104 to 105): 45. It seems to us that the effect of these authorities is plain. One of the primary tasks of the Commissioners is to recover those taxes which Parliament has decreed shall be paid. Section 1 of the 1970 Act permits the Commissioners to set about this task pragmatically and to have regard to principles of good management. Concessions can be made where those will facilitate the overall task of tax collection. We draw attention, however, to Lord Diplock s statement that the Commissioners managerial discretion is as to the best manner of obtaining for the national exchequer the highest net return that is practicable. 46. No doubt, when interpreting tax legislation, it is open to the Commissioners to be as purposive as the most pro-active judge in attempting to ensure that effect is given to the intention of Parliament and that anomalies and injustices are avoided. But in the light of the authorities that we have cited above and of fundamental constitutional principle we do not see how s 1 of the TMA can authorise the Commissioners to announce that they will deliberately refrain from collecting taxes that Parliament has unequivocally decreed shall be paid, not because this will facilitate the overall task of collecting taxes, but because the Commissioners take the view that it is objectionable that the taxpayer should have to pay the taxes in question.

131 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev When the case came before the House of Lords, Lord Hoffmann remarked (at page 114) that on this point the judgment of the Court of Appeal is in my opinion unanswerable. He further pointed out that the Commissioners are not the Crown, owners of the consolidated fund and able to deal with its property like any other owner. After quoting Lord Diplock s description of the Revenue s discretion in the Fleet Street Casuals case, he said this (at page 114): 21. This discretion enables the Commissioners to formulate policy in the interstices of the tax legislation, dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time. The Commissioners publish extra-statutory concessions for the guidance of the public and Miss Rose drew attention to some which she said went beyond mere management of the efficient collection of the revenue. I express no view on whether she is right about this, but if she is, it means that the Commissioners may have exceeded their powers under s1oftma. It does not justify construing the power so widely as to enable the Commissioners to concede, by extra-statutory concession, an allowance which Parliament could have granted but did not grant, and on grounds not of pragmatism in the collection of tax but of general equity between men and women Therefore the House of Lords decision in the Wilkinson case clarified the extent of the Commissioners administrative discretion in relation to ESCs. Following that decision, HMRC has reviewed its published ESCs. In anticipation of the need to give legislative effect to some of the ESCs, section 160 of Finance Act 2008 provided an enabling power allowing the tax treatment afforded by existing published concessions (those granted before 21 July 2008) to be given statutory effect. A consultation process was undertaken in 2009 and the ESCs were updated by HMRC in Most ESCs have continued in their current form, as they are within the scope of HMRC s collection and management powers. However, where an existing concession exceeds the scope of HMRC s administrative discretion, as clarified in the Wilkinson case, such concession will be put onto a legislative basis as appropriate It should however be emphasised that the Wilkinson case did not affect the settled principle relating to the negotiated settlements with individual taxpayers as established in the Fleet Street Casuals case. Therefore it is curious that the C&AG reported some differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners ability to exercise these powers to resolve tax disputes. The Wilkinson judgment has no significant implication on the Commissioners ability to exercise their collection and management powers to resolve the tax disputes examined by the C&AG. The duty of the Commissioners remains as set out by Lord Diplock in 1981 in the Fleet Street Casuals case, namely: to exercise their power to forego the collection of tax for reasons of good management only rather than for some extraneous or ulterior reason, and to ensure that any such decision is lawful and not ultra vires Thus in Al Fayed and Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703, the Court of Session of Scotland held that an agreement in respect of forward payments was ultra vires. Therefore, HMRC did not act unfairly in terminating it; according to Lord Cullen, There can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so In Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374, Lord Diplock developed the three classic grounds for the judicial review of administrative decisions, which the Commissioners and their legal adviser would be expected to take into account in the exercise of that discretion. First, the decision must not be vitiated by illegality, which, according to Lord Diplock (at 410), mean[s] that the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it. Secondly, it must not be irrational. In the words of Lord Diplock (at page 410) this means a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it. Finally, procedural impropriety. He explained (at page 411) that: susceptibility to judicial review under this head covers also failure... to observe procedural rules... even where such failure does not involve any denial of natural justice Against this background, the apparent differences of view within the Department on the implications of the Wilkinson judgement on the Commissioners ability to exercise these powers to resolve tax disputes indicates an illegality under the above principles. As explained above, none of the lawyers that constitute the Senior Management Team (SMT) of HMRC s Solicitors Office is a tax lawyer. In view of the fact that these lawyers are most likely to provide informal advice to the Commissioners, the C&AG s identification (from the relatively small sample of cases they examined) of a case in which Commissioners had been asked to exercise their collection and management powers on the basis of oral advice from the Department s Solicitor s Office gives cause for concern Indeed, in view of Lord Hoffmann s statement in the Wilkinson case that the Commissioners are not the Crown, owners of the consolidated fund and able to deal with its property like any other owner, the exercise of the Commissioners power to forego the collection of tax on the basis of oral advice from the Solicitor s Office raises a real issue as to whether the discretion was exercised for good management or for some extraneous or ulterior reason. It is difficult to imagine a situation in which an oral advice would have been appropriate, let alone in circumstances in which the C&AG himself found that it would have been helpful to have secured confirmation of that advice in writing to provide a clearer audit trail. Therefore, there appear to be real issues of irrationality and procedural impropriety under administrative law grounds.

132 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 108 Committee of Public Accounts: Evidence 3.32 The C&AG s report does not address these issues adequately, and in the final analysis his conclusion that he did not identify any instances where these powers were exercised inappropriately appears to lack the credibility the public would expect from his good offices. Indeed, that conclusion itself is arguably susceptible to a challenge on the grounds of illegality and/or irrationality and/or procedural impropriety. Introduction Part Four: HMRC s Evidence and Submissions on its Duties of Confidentiality and Accountability 4.1 As an elected assembly whose members serve as the chosen representatives of the people, the House of Commons exercises the power to impose taxes and duties upon the people and to vote money for public services. The exercise of this power gives to the Commons the chief authority in the State. Select Committees are appointed by the House to perform a variety of functions, generally of inquiry, investigation and scrutiny and they report their findings and recommendations to the House. Most House of Commons Select Committees have a continuing existence and their terms of reference and powers are laid down in Standing Orders of the House. Thus the PAC is appointed by the House to examine the accounts showing the appropriation of the sums granted to Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the Committee may think fit (Standing Order No 148). The Committee focuses on value-for-money criteria which are based on economy, effectiveness and efficiency. On the other hand, the TSC is appointed by the House of Commons to examine the expenditure, administration and policy of HMRC. 4.2 The powers of Select Committees derive from the powers of the House and from the Standing Orders. Select Committees (and their Sub-Committees) have power to send for persons, papers and records relevant to their terms of reference. The issue of an order for an individual to attend or to provide evidence can exercise these powers, formally. However, the general practice of select committees is to request witnesses to give evidence to them by means of an informal invitation issued through their clerks of the chairman of the committee. Select committees seldom use their formal powers to summon individuals, preferring to keep them in reserve. Select Committees own deliberations are held in closed session but Committees usually admit the public and the press to hearings at which they take evidence from witnesses. Committees may, on request from a witness, agree to take evidence in closed session if sensitive or confidential material is likely to be discussed. 4.3 Following a recommendation of the Public Service Committee of the Commons both Houses came to Resolution to the following effect: That, in the opinion of this House, the following principles should govern the conduct of ministers of the Crown in relation to Parliament: ministers have a duty to Parliament to account, and be held to account, for policies, decisions and actions of their departments...; it is of paramount importance that ministers give accurate and truthful information to Parliament, correcting any inadvertent error at the earliest opportunity. Ministers who knowingly mislead Parliament will be expected to offer their resignations to the Prime Minister; ministers should be as open as possible with Parliament, refusing to provide information only when disclosure would not be in the public interest, which should be decided in accordance with relevant statute, and the government s Code of Practice on Access to Governmental Information (second edition, January 1997) [from 1 January 2005 the Freedom of Information Act 2000 ]; similarly, ministers should require civil servants who give evidence before parliamentary committees on their behalf and under their directions to be as helpful as possible in providing accurate, truthful and full information, in accordance with the duties and responsibilities of civil servants as set out in the Civil Service Code. 4.4 As the heads of a non-ministerial government department, the Commissioners owe similar duties to Parliament as Ministers in charge of Ministerial departments. This is in addition to the Commissioners basic accountabilities to Ministers and to the public. According to the authoritative Erskine May s treatise on the law, privileges, proceedings and usage of Parliament 11 a witness is bound to provide all information and documents requested by a Select Committee even where there would be an excuse in a court of law. If witnesses are bound to disclose any information which a Select Committee sees fit to request of them even where such disclosure would ordinarily be prohibited by law, it is remarkable that HMRC s officials have refused to disclose information requested by the PAC and the TSC despite the absence of any legal prohibition from such disclosure. Information withheld is official secrets and not taxpayer confidential information 4.5 The nature and scope of taxpayer confidentiality were also discussed in the Fleet Street Casuals case referred to above. In support of their case, the Federation had sought to get the Inland Revenue to disclose their papers relating to the special arrangement with the casual workers, especially as to the negotiations with the unions and the employers. The Revenue argued that taxpayer confidentiality would be breached if the Federation was granted leave to bring a judicial review and maintained that the Department s statutory duty of confidentiality indicated that the legislation imposed no duty owed to a taxpayer (or the general body of taxpayers) in respect of the collection of taxes due from another taxpayer rd Edition, pages

133 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev However, the issue of taxpayer confidentiality should not have been raised by the Inland Revenue in that case as a defence to the Federation s claim. As Lord Diplock indicated in his speech referred to above, the Revenue is under a statutory duty of confidentiality with respect to information about individual taxpayers affairs that has been obtained in the course of their duties in making assessments and collecting the taxes. Thus adopting the argument of the counsel for the Federation, his Lordship pointed out (at page 169) that: Consideration of the Federation s complaint would not involve any departure from the Board s statutory duty to preserve the confidentiality of information obtained by its inspectors and collectors about individual taxpayers affairs, since ex hypothesi the members of this class of taxpayers had made no returns and had not provided any information about their affairs. 4.7 The same point was made by Lord Scarman. He said: (at 179): In the present case, had the Federation shown a sufficient interest, I doubt whether any legitimate objection could have been taken to discovery of documents relevant to the making of the special arrangement. Such documents would be unlikely to contain any information about the affairs of any Fleet Street casual who had succeeded by various devices in avoiding his identity being discovered by the searches of the Revenue. 4.8 Therefore, just as the Inland Revenue was wrong to seek to hide behind taxpayer confidentiality in the Fleet Street Casuals case, HMRC and the NAO are wrong to do so now in order to evade their duties of transparency and accountability on the settlement of recent high profile tax disputes. It is clear from the above report of the C&AG and HMRC s evidence and submissions (detailed below) that the information withheld recently from Parliament and the public for reasons of taxpayer confidentiality is not taxpayer confidential information but HMRC s official secrets. 4.9 As explained in the enclosed paper, HMRC s official secrets fall within the general provisions of the Freedom of Information Act 2000 (FOIA) and is thus covered by the Cabinet Office Guidance on the Provision of Departmental Evidence and Response to Select Committees (known as the Osmotherly Rules ). The guidance states that: 9. Select Committees have a crucial role in ensuring the full and proper accountability of the Executive to Parliament. Ministers have emphasised that, when officials represent them before Select Committees, they should be as forthcoming and helpful as they can in providing information relevant to Committee inquiries. In giving evidence to Select Committees, officials should take care to ensure that no information is withheld which would not be exempted if a parallel request were made under the Freedom of Information Act. (emphasis supplied) 4.10 Surely, it could not have been the intention of Parliament that information that would be disclosed to anybody, anywhere in the world under the FOIA would be withheld from the Select Committees of the House of Commons. Taxpayer Confidential Information can be Disclosed Lawfully 4.11 It was also established in the Fleet Street Casuals case that taxpayer confidential information can be disclosed to Parliament and to the public where the public interest in transparency and accountability requires this. In the words of Lord Scarman (at 178): the duty of confidence can co-exist with the duty of fairness owed to the general body of taxpayers Section 182 of Finance Act 1989 authorises the C&AG and his staff in the NAO to disclose information (including taxpayer confidential information and HMRC s official secrets) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC. Similarly, section 18 of the CRCA authorises the Commissioners and their staff in HMRC to disclose information (including taxpayer confidential information and HMRC s official secrets) to Parliament and the public for the purposes of improving the accountability and transparency of the settlement of large and complex tax cases by HMRC Indeed, HMRC s Information Disclosure Guidance (issued by ExCom) states that: The essential point to bear in mind when making a disclosure for the purposes of HMRC s functions is that confidentiality should not stand in the way of an HMRC officer performing an HMRC duty or function. If you need to disclose information held by HMRC in order to carry out a function of HMRC then such a disclosure can be made for the purposes of HMRC s functions Greater transparency is also at the heart of the Government s commitment to enable the public to hold politicians and public bodies to account and to reduce the deficit. In his first major speech as Prime Minister, on 29 May 2010, the Prime Minister said: If there s one thing I ve noticed since doing this job, it s how all the information about government; the money it spends, where it spends it, the results it achieves; how so much of it is locked away in a vault marked sort of private for the eyes of ministers and officials only. I think this is ridiculous. It s your money, your government, you should know what s going on. So we re going to rip off that cloak of secrecy and extend transparency as far and as wide as possible. By bringing information out into the open, you ll be able to hold government and public services to account.

134 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 110 Committee of Public Accounts: Evidence 4.15 In line with these policy objectives, HMRC has also adopted an Openness Policy Statement approved by ExCom to encourage all staff to deal with information as openly as they can in both dealing with FOI requests and in the proactive publication of departmental information. The statement declares that: Openness is a core HMRC value. The department is fully committed to being accountable in its role of serving the public. In both internal and external communications it is important we are open about the way we work, the information we hold, and how we take decisions. Staff should always try to communicate in plain language and release information in an accurate and timely fashion, making full use of the Internet to publicise our role and achievements. Being open with information will enhance our relationship with stakeholders and help maintain the public s trust in HMRC Against this background HMRC has a long-established practice of issuing graphic press releases containing sensitive personal information of people convicted of tax offences (including names, date of birth, addresses and photographs) and publishing these on its website. The Department also participated in the recent BBC documentary Saints and Scroungers in which a presenter followed fraud officers as they bust the benefits thieves stealing millions of pounds every year. It is pertinent to note that the general duty of confidentiality under section 18(1) of CRCA applies to any information held by HMRC in connection with any of its function, including information that may be in the public domain already As the availability of information in the public domain is not an exception to the duty of confidentiality under section 18(1) a specific gateway is required to issue these press releases lawfully. HMRC applies section 18(2)(a) of CRCA which permits a disclosure made for the purposes of its function. The Commissioners consider that the duties of transparency and accountability HMRC owes to the general body of taxpayers override any duty of confidentiality it owes to the individual customers concerned. In these circumstances, such disclosures constitute a lawful interference with the rights of the affected customers to private and family life under Human Rights legislation. In particular, the policy objectives of this measure go beyond deterrence and include the provision of visible assurance to the majority of taxpayers who play by the rules that HMRC is taking action against the minority that break the rules Similarly, the Commissioners have always known that section 18(2)(a) of CRCA also authorises the disclosure of information about corporate customers involved in controversial settlements to Select Committees of the House of Commons that have oversight functions over the Department, such as the PAC and the TSC. Such disclosures are clearly necessary in order to assure Parliament and the public that cases involving large sums of money are being settled correctly. However, in recent evidence and submissions to the PAC and the TSC, senior officials of HMRC have consistently refused to disclose information needed to assure Parliament and the public that due process in the discharge of the Department s collection and management functions is being followed especially in the way disputes with large companies are resolved. Oral Evidence to the PAC on 28 January At a hearing of the PAC on 28 th January 2008 on the C&AG s report, Management of large business Corporation Tax (HC 614), Mr Hartnett (then Acting Chairman of HMRC) and other officials gave oral evidence. The following exchange is an extract from the record of the proceedings (HC 302-i): Q2. Chairman: Thank you. Perhaps we could start by looking at how good you are at raising this. If we look at paragraph 2.7 which relates to figure five, I was quite surprised to read, Mr Hartnett, that 58% of open inquiries involve cases where the tax under consideration is less than 500,000. So you have got 58% of your inquiries generating only 1% additional Corporation Tax. Do you really have a grip on this tax? Mr Hartnett: I think we do, Chairman. We were very conscious that figure was too high. We have been reducing it as we have switched our resource to bigger risks. We have looked at these smaller risks and have closed a great number of them down. I will just ask Melanie if she can give you a number to give you a feel for it. Ms Dawes: Since February, when the Report was written and that figure was produced, we have cut the number of issues for less than 500,000 by 55%. What we have also done is introduce a more rounded measure of a small issue that takes into account not just the monetary amount but also looks at the probability of success and the impact on the wider tax system. We have set ourselves a target for that in this financial year of cutting those small issues by 75% and so far we have achieved a 70% reduction in the nine months to the end of December. Q3. Chairman: So it would not be a fair criticism to say you are concentrating on the small fry and letting the big fish get away? Mr Hartnett: Absolutely not, Chairman. Some of the big fish are very big indeed. We have applied a lot more resource to those, taking a taskforce approach to the biggest risks, recently applying more than 150 of our officers, plus outside counsel and others, on just one case. Q4. Chairman: You see, what surprises me is that many people will be as astonished by this as I was. If we look at 1.12 what we see there is a third of large businesses pay no Corporation Tax at all. That is extraordinary. Do you think that members of the public, if they were watching this, would find that very strange? Mr Hartnett: I think members of the public would be interested to know why that is.

135 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 111 Q5. Chairman: I think they would be, so you are now going to tell us. Mr Hartnett: If we were to explain it to them I think they would begin to understand why it is like that. London, as a financial centre, attracts the headquarters of many corporates but not the economic activity behind it, so there are many large businesses which have very little economic activity to be taxed in the UK. Nearly 38% of the activity of UK quoted groups happens abroad and much of the profit will be taxed abroad. Some great UK corporations have very substantial accumulated losses. Some industries in particular have a lot of losses brought forward from the late 1990s, and I am thinking of telecoms and manufacturing. The UK is regarded as having a relatively generous regime for interest relief as well. Then, of course, there are pension contributions and it would be remiss of me not to say that tax avoidance plays a part in this and we bear down on that. Q6. Chairman: That is what worries me. Let us look at paragraph 4.9, and you have mentioned tax avoidance: Our consultation with large businesses indicated that they felt there was a widening gap between the skill set of their tax department staff and that of the Large Business Service. Could it be that you are simply, not to mince words, being taken for a ride by some big companies? Mr Hartnett: I do not think so, Chairman. I really do not believe that is a serious proposition. With the introduction of tax disclosure rules in 2004 and with Government having closed a great number of tax avoidance schemes, what we are learning from both business and their advisers is that marketing schemes are substantially in the past, although clearly not entirely. We are seeing fewer disclosed and we test to make sure disclosure is made. I think we have been very effective in countering avoidance. Am I complacent, of course not, I think there is scope for us to do more. Q7. Chairman: Do you think you really have a proper measure of the gap between what companies are supposed to pay and what they do pay? The technical term is tax gap but, to put it in a way that ordinary people understand, do you actually know whether people are paying the right amount of Corporation Tax? Mr Hartnett: I think we can be confident in absolute terms that there is a tax gap. What we are less confident about is how to measure it but there are broadly two approaches. We can have a bottom-up approach through random inquiries, a tried and tested method that we used for direct access with small business, but which works much less well with big business, and we can have a top-down approach through our estimates of tax risk. I think we are getting better and better at estimating the tax risk. Q8. Chairman: You saying you are getting better and better, but if we look at paragraph 2.11 we see that Corporation Tax at risk is now at 8.5 billion. That is a lot of money, is it not? Mr Hartnett: It is a lot of money. Q9. Chairman: So compliance amongst large business is a very serious problem, is it not? Mr Hartnett: Securing compliance is something we are tackling vigorously, but a lot of the 8.5 billion is tax at risk which may be on technical issues, may be cross-border issues. I am afraid I cannot tell you sat here at the moment how much of that is tax avoidance but some will undoubtedly be. Q10. Chairman: Putting it in simple terms the public might understand, would it not be helpful if these large companies had to publish in their accounts what profits they are making and what tax they are paying? Mr Hartnett: I think that would Q11. Chairman: It would add transparency, would it not, and reassure the public? Mr Hartnett: It would certainly add transparency but, Chairman, it is there for many of them already. Q12. Chairman: It is there, is it? Mr Hartnett: It is there for many of them. Q13. Chairman: Sorry? Mr Hartnett: It is there for many of them already. You can deduce that, and best practice for some Q14. Chairman: What do you mean you can deduce that? Mr Hartnett: You can look at the published accounts, you can look at the tax account and you can work out roughly what tax is paid against what profits, but the big challenge in the UK compared with, say, the United States, Australia and some other countries, is that we do not have a consolidation for tax purposes in the UK of group accounts. Q15. Chairman: Should we have one? Mr Hartnett: A consolidation, a merging of Q16. Chairman: Should we have one? Mr Hartnett: I think it would be quite helpful in terms of measuring compliance, but in the past we have found it very difficult to come up with a proposal that works. Q17. Chairman: You are working at it? Mr Hartnett: We are certainly doing that. Chairman: Thank you, Mr Hartnett. Q18. Mr Touhig: Mr Hartnett, you will no doubt have seen the headlines generated when the Comptroller and Auditor General published his report last year: One-third of the biggest UK businesses paid no tax

136 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 112 Committee of Public Accounts: Evidence said the Financial Times on 27 August, Revealed: how multinational companies avoid tax from The Guardian on 6 November. Of course, the Chairman has asked the question that was on everybody s lips, how come one-third of the country s 700 largest businesses paid no Corporation Tax in You did give some response as to why that should be the case but can you give us a list of the 200 companies which paid no Corporation Tax in or ? You can write if you do not have them. Mr Hartnett: We certainly do not have them to hand, Mr Touhig. We will look at that. Q19. Chairman: You will look at it or you will do it? Mr Hartnett: No, we will do it if we can. About 10% of those are gone, they no longer exist. Q20. Mr Touhig: Can you also tell us which of these companies paid no tax because they did not make any profit? Mr Hartnett: I think we can do that as well. Q21. Mr Touhig: Can you also tell us which companies paid no Corporation Tax because they successfully applied for tax relief? Mr Hartnett: You will have to help me, Mr Touhig, because there are innumerable tax reliefs. Q22. Mr Touhig: Can you give us some examples then? Mr Hartnett: We can certainly give you some examples. Q23. Mr Touhig: Can you also tell us which companies paid no Corporation Tax because they used tax avoidance measures which are appropriate and are allowable? Mr Hartnett: Let me express a concern. You are beginning to ask me to disclose very great details about individual companies where we have a duty of confidentiality and I would be very concerned indeed, Mr Touhig, if suddenly all this information was to be made public. Q24. Mr Touhig: Do you not think the public has a right to know? The report says on page 19: Tax avoidance is not easily definable but it can involve highly creative ways of using tax laws to reduce or defer tax. Should we not know which companies are doing that? Mr Hartnett: I go back to where I am. I am under a statutory duty of confidentiality, as are my colleagues. Q25. Mr Touhig: So you cannot tell us which companies are using methods of tax avoidance? Mr Hartnett: I think we can help you with some details about this, but listing this company by company in the sort of detail you are now asking is very difficult indeed. Q26. Chairman: This point raised by Don Touhig is very important. You say you have a duty of confidentiality. Mr Hartnett: Statutory duty. Q27. Chairman: We understand that it is a duty particularly to individuals but these are public companies. Mr Hartnett: I am afraid all our legal advice is that they have the same statutory right of confidentiality. Chairman: We are only trying to help you. Do you not think it helps your job getting this into the public domain. It is not just about naming and shaming, it is ensuring that there is public discussion about some very large companies that are not paying tax and you sheltering behind this blanket of confidentiality. I want you to think very carefully in the answers you give to Mr Touhig whether you cannot be rather more helpful to him. I hand back to you, Mr Touhig. Q28. Mr Touhig: Perhaps you would like to reflect on the question I have asked and write to us and if we need further correspondence we can do so, but I do think it is in the public interest that we should know this. Mr Hartnett: Certainly, Mr Touhig Mr Hartnett is well aware that the same legal considerations the Commissioners apply to the publication of information about HMRC s customers involved in tax offences also apply to the information requested by the PAC on this occasion because both sets of information are available in the public domain. In fact, he explained in that exchange [Q13 and Q14] that much of the information requested was available in the public domain it is there for many of them already... you can look at the published accounts, you can look at the tax account and you can work out roughly what tax is paid against what profits. Yet the Department refused to provide it to the PAC. Oral Evidence to the PAC on 28 January In the event HMRC refused to disclose the information and by the time of the subsequent hearing on 28 th January 2009 on the C&AG s report HMRC: Management of tax debt (HC 1152) the PAC appeared to have accepted that it cannot obtain relevant information from HMRC(HC 216-i): Q50. Mr Touhig:... We have asked before for information about companies that avoid payment of tax and we were told that because of data protection we could not be told, but one hears all sorts of stories about companies who do find all sorts of ways to avoid paying their liability when it is due....

137 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 113 Q51. Mr Touhig: Would it be possible for you to provide the Committee with a note on the companies by turnover and the liability and the ones that you are having persistent problems with. I am sure you will not want to give us the names. Mrs Strathie: No. Oral Evidence to the PAC on 9 March In oral evidence to the PAC on 9 March 2009 on the Report by the Comptroller and Auditor General (HC 942) on HM Revenue and Customs: the Control and Facilitation of Imports, HMRC s officials including the Chief Executive Ms Lesley Strathie and Ms Melanie Dawes, then Acting Director General Business Tax gave the following evidence: Q75. Dr Pugh: The last question I have to ask you is about the differential treatment of big business versus small business. I got the impression from the NAO Report that although there was no particular reason for it your focus had been more on smaller businesses than on larger businesses. Am I correct in thinking that? Ms Dawes: We try to focus on all sizes of business and we actually have very high staff ratios for the large businesses, with just under 100 staff looking after only 650 customers, accounting for about half of trade by value from outside the EU. We actually try to adopt quite a balanced approach and if anything put really very high resources into the large business side. Q76. Dr Pugh: Why is it then that paragraph 12 says, The revenue generated from audits of large businesses has decreased by 67% in real terms and then in paragraph 13 it mentions that the proportion of audits identifying irregularities in smaller businesses has obviously gone up and the amount you are getting from them has also gone up. Have large businesses become very law abiding? Ms Dawes: They might have done. Q77. Dr Pugh: What is your reason for thinking that they might have? Ms Dawes: Behind those figures there are two very large individual repayments of VAT duty that were included in the figures for 2006 and if you take those out the reduction in yield from audits from the large business side is Q78. Dr Pugh: Was there a huge serial offender in the previous year? Ms Dawes: There were two big cases where there had been very large areas where Q79. Dr Pugh: What, as a matter of interest, were those two big cases about? Ms Dawes: We have to be careful here about customer confidentiality. This is an area where, as I understand it, errors were made and where we recently settled quite a large set of issues over a number of years. Q80. Dr Pugh: But you can tell us who made the errors. Ms Dawes: I cannot tell you who made the errors no, I am afraid not. Q81. Dr Pugh: The companies that benefited from the errors then? Ms Dawes: No, I am afraid I cannot give you any individual names of companies, no. We are not able to do that. Q82. Dr Pugh: They obviously had a huge significance. Ms Dawes: It is the sort of thing that happens with large business work all the time. We do get large amounts of money. From the nature of these companies they are accounting for very large amounts of trade and large amounts of duty and so when we have an individual issue with one company it can have a big impact on the figures. I was really just trying to explain that if you take those impacts out there is a fall in the yield from the large business side. Dr Pugh: It must be a very big company. Q83. Chairman: Why do you say you cannot give the names of the companies? Perhaps you cannot give them in public session but you can send us a note. Ms Dawes: We are not able to release those figures in the public domain. I think this is a debate that we have probably had with you before. Q84. Chairman: We would not release them. You cannot just announce to the Committee that you are not prepared to give a parliamentary committee the names of companies in confidence. You do not have that right. Ms Strathie: I think you know we are bound by taxpayer confidentiality and you did point out earlier that if we give you something in confidence you then decide whether it stays in confidence. Q85. Chairman: I am not asking you to reveal the individual s tax affairs, we are talking about companies. We often get given details about companies, for instance from the Ministry of Defence. Are you refusing point blank to give us this information? Ms Strathie: That is our position because of taxpayer confidentiality. I know that you often receive information about companies and indeed very often when something is in the public domain, perhaps as

138 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 114 Committee of Public Accounts: Evidence a result of prosecution or something else, then those matters become public. However, regarding the tax affairs of individual companies that is not something that we can reveal. Chairman: We may have to think about that; I may have to take this up with the cabinet secretary I think. Letter by Mr Edward Leigh MP to Sir Gus O Donnell 4.23 Mr Edward Leigh wrote to the Cabinet Secretary, Sir Gus O Donnell KCB, on 25 th March In the letter (copied to Ms Strathie), Mr Leigh contended that the PAC was entitled to information about identified taxpayers for the purposes of its proceedings; that witnesses providing such information would be protected by parliamentary privilege; and that the exemption in section 18(2)(b) of CRCA, together with section 20(1)(a) permitted such a disclosure, provided it was made on the instructions of the Commissioners. Just as he did during the examination referred to above, Mr Leigh suggested that the PAC would be willing to take such evidence in private session The issue was discussed within HMRC and in June 2009, Mr Hartnett approved a memorandum requesting ExCom to maintain the policy of not disclosing identifiable taxpayer information to the PAC. The memo, which provides a useful insight into the modus operandi of Mr Hartnett s powers (both in regard to the exercise of the Commissioners discretion to forego the collection of tax and discretion to withhold information) is set out in full: Title: Disclosure of HMRC customer information to PAC Date of Meeting to be considered: 23 June 2009 Decision required: ExCom are asked to agree that: HMRC maintains the general policy of not disclosing identifiable taxpayer information, unless the Commissioners agree it is strictly necessary for HMRC s functions; A Letter is sent to Gus O Donnell from Lesley Strathie providing a response to the two points raised by Edward Leigh. A draft letter is attached; Ministers are made aware of Edward Leigh s approach and the terms in which we propose to respond before any reply is sent. Author: [Information Policy Officials] Signed Off by: Dave Hartnett Summary: Edward Leigh, Chairman of PAC, has written to Gus O Donnell challenging HMRC s refusal to disclose identifiable taxpayer information to the Committee. We have taken legal advice and considered the risks and possible consequences of such disclosure. We recommend that we maintain the Departmental policy of only disclosing such information where Commissioners are agreed that it is strictly necessary for the department s functions. This would require very exceptional circumstances which are not present in the particular case which gave rise to Edward Leigh s letter. We attach a draft letter to Gus O Donnell suggesting how he should reply to Edward Leigh. Background 1. Taxpayer confidentiality is a long-established principle consistently upheld by Parliament. 2. During the passage of the Commissioners for Revenue and Customs Act (CRCA) through Parliament in early 2005, both the Lords and the Commons were concerned to ensure that taxpayer confidentiality would not be compromised by the merger. Reflecting these concerns, Government Ministers gave clear commitments that taxpayer confidentiality would not be watered down or eroded. HMRC has a statutory duty of confidentiality protecting customer information and a criminal sanction for the wrongful disclosure of such information. 3. HMRC s policy (found in the Information Disclosure Guidance on the intranet) is that information that does not enable individual taxpayers to be identified may be disclosed so long as disclosure is conducive to or expedient for HMRC s functions. So, HMRC officials can and do give detailed anonymised evidence to Select Committees. However, where taxpayer-identifying information is concerned, HMRC s policy is that disclosure can only be justified if it is strictly necessary for HMRC s functions, which would be very exceptional in these circumstances. Options considered: 4. We considered the options of maintaining the departmental policy, or alternatively, disclosing identifiable taxpayer information to the PAC. 5. Section 18 of the CRCA prohibits the disclosure of information held by HMRC unless for specified exceptions. In the current case, the only exception is that permitting disclosure for the purpose of a function. It is difficult to identify an example where it would be necessary for HMRC s functions to disclose taxpayer identifying information to the PAC. 6. In any case, we sought legal advice from First Treasury Counsel. He advised that as the PAC are a Parliamentary body with an oversight role over HMRC it follows that HMRC s functions would extend to assist the PAC with that oversight role. So there is no absolute bar on disclosure but this would still be

139 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 115 at HMRC s discretion and wrongful disclosure would still be a criminal offence. Counsel was of the view that Parliamentary privilege would be unlikely to provide protection to an HMRC official charged with such an offence, because the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content. 7. There are no legal restrictions on onward disclosure of any information provided to PAC, so any assurances by PAC of keeping information confidential would not be enforceable by HMRC. We would be right to assume that information we provide as evidence to PAC would in all likelihood become public in one way or another. There are also Human Rights Act and Data Protection Act considerations that could make the disclosures very risky. Counsel advised therefore that it was legitimate to take a cautious and strict approach in line with our established policy for HMRC. 8. Dave Hartnett, as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information. Key Risks: 9. We have identified a number of potential risks in making a change to the departmental policy: (a) Exposure of HMRC staff to criminal liability. We would risk HMRC staff breaching HMRC s duty of confidentiality and being subjected to criminal proceedings for wrongful disclosure. (b) Damaging effect on our relationship with taxpayers. Our long-established practice in this area has created an expectation among taxpayers that we will not normally divulge taxpayer specific information. This has helped foster trust in how our customers engage with us. Any departure from this approach should be resisted. Without adequate safeguards and guarantees about confidentiality some of our customers could refuse to provide us with any information that they are not statutorily obliged to give. In extreme cases our customers might refuse to cooperate with us, claiming any disclosure of their information to others without clear transparent legal authority provides an excuse for non-compliance. This would be a particularly retrograde step in the context of our work with large corporates. This breakdown of trust would create a risk to the operation of the tax system which relies on our customers providing real time information to us and could have a detrimental effect on the tax yield we collect. Our confidentiality rules have meant that we have to legislate even to enable us to publish the names of deliberate tax defaulters. It would be a major step change in the dynamic of the relationship we as a tax authority have with our taxpayers were we to give such information. Other countries have the same approach we have of not providing this to Parliament, except those countries where a democratic system is not upheld. Disclosure of customer information to Parliament could have serious consequences for the reputation of the taxpayer (including the share price of listed companies) depending on the reason for disclosure and what information was disclosed. (c) Damaging effect on Ministers. Our relationship with Ministers has always been an arm s length one, and consequently they are told very little about individual taxpayers. By and large Ministers have recognised that it is in their interests not to receive taxpayer information as it distances them from particular cases and protects them from accusations of political interference. If we were to provide taxpayer information to the PAC it could not be withheld from Ministers, who could thereby be drawn into areas they wish to avoid. If there were any possibility of changing our current practice it would therefore be essential to consult Treasury Ministers before doing so. (d) Damaging effect on our relationship with other government departments and agencies. We operate strict rules in disclosing information to other government departments and agencies. Successive Ministers have insisted upon legal provisions (statutory gateways) being established in line with the policy principles for the supply of HMRC data which provide clarity about the type of information to be disclosed and a criminal sanction for wrongful disclosure by the recipient. We have upheld these principles for some time, often against strong opposition. Although disclosure to the PAC (as a Parliamentary oversight body) would be fundamentally different, any change to our stance on confidentiality risks undermining our position and coming under greater pressure to disclose customer information to others without those safeguard. (e) Damaging effect on our reputation. Disclosure to the PAC would erode our integrity on confidentiality. Disclosing taxpayer information to a third party who may at times have political reasons for asking for the information risks undermining our reputation for impartiality. Our reputation could be damaged if we were seen to be involved in very political issues. Privacy lobby groups such as Liberty have been gaining more widespread support over recent times as the public perceive that Government action leads to more undermining of personal privacy. Such lobby groups could be expected to raise considerable concerns about erosion of our traditional approach to maintaining taxpayer confidentiality. (f) Attitude of Parliament. It is risky to assume that Parliament as a whole (as opposed to the PAC or its chairman) would support the disclosure of taxpayer specific information to the PAC. Parliament has always had a very lively sense of the advantages of the very strict rules that have always

140 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 116 Committee of Public Accounts: Evidence protected the confidentiality of tax information. MPs are taxpayers themselves and recent events around expenses will have made Parliament more wary of situations in which the tax affairs of individuals might become the subject of public scrutiny. Impacts Financial and Performance The potential to have an effect on the compliance could impact on tax yield. Customer Impact on HMRC s reputation and our relations with customers are described above. Internal & External Stakeholder Consultation: This note and recommendation have been agreed with Solicitor s Office. Next Steps If ExCom are content with the recommendation, we will inform Ministers of our approach, and send the draft letter to Gus O Donnell to allow him to reply to Edward Leigh before Summer Recess begins on 21 July Apart from the fact that this note is misleading in essence and does not refer to the public interest in transparency and accountability at all, it shows the hallmarks of the shortcomings highlighted above in relation to the exercise of the HMRC s statutory discretion to forego the collection of tax. First of all, it confirms that Mr Hartnett, as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information. Secondly, despite the fact that the objective of this is purportedly to advise ExCom as to the lawful exercise of the Commissioners statutory discretion, the note was not written by HMRC s lawyers or signed off by HMRC s General Counsel and Solicitor who is responsible for all legal services to HMRC and for corporate governance ; instead it was written by lay officials in Central Policy and signed off by Mr Hartnett. Thirdly, although it is claimed that the note and recommendation have been agreed with Solicitor s Office, there was no accompanying legal advice either from the Treasury Counsel consulted by the Solicitor s Office or from the Solicitor s Office itself. Despite these shortcomings there was sufficient scope to obtain the imprimatur of ExCom, Treasury Ministers and the Cabinet to what is essentially a fait accompli by Mr Hartnett Furthermore, it is conceded in the memo that the legal advice from First Treasury Counsel stated that HMRC s functions extends to assisting the PAC with that oversight role such that relevant information can be disclosed to it by virtue of section 18 of the CRCA. However, the draft letter enclosed to the note (suggesting how Sir Gus O Donnell should reply to Mr Leigh) did not include this detail. The draft letter is as follows: Draft letter for Gus O Donnell to send to Edward Leigh MP Thank you for your letter dated 25 March 2009, copied to Lesley Strathie. I understand that the information to which you refer is information in respect of named or identifiable taxpayers. She and I have considered the points you make in your letter very carefully. HMRC takes very seriously its duty to be as open and as helpful as possible to the PAC. However, the department is subject to statutory constraints on disclosure of taxpayer information which were approved by Parliament as recently as 2005 when the CRCA was passed enabling the merger of the Inland Revenue and HM Customs and Excise. Both Houses of Parliament were very concerned to ensure that the duty and tradition of keeping personal tax information confidential should not be eroded as a result of the formation of the new department. You suggest that HMRC could disclose information about individual taxpayers to the Committee under the provision in CRCA, which provides an exception to HMRC s statutory duty of confidentiality for disclosures in the public interest that are made on the directions of the Commissioners. However this exception applies only to disclosures of particular types of information for specific purposes, which are set out in the Act. None of these cover disclosures of the type the PAC is seeking. Dave Hartnett, as Permanent Secretary for Tax has the delegated authority on behalf of ExCom to decide on issues of disclosure of information. It is HMRC s established policy that information that does not enable individual taxpayers to be identified may be disclosed so long as disclosure is conducive to or expedient for HMRC s functions. In line with this policy, HMRC officials regularly provide detailed statistical evidence to Select Committees, including the PAC, about (for example) tax avoidance by size of company or by industry sector. However, where taxpayer-identifying information is concerned, HMRC s policy is that disclosure can only be justified if it is strictly necessary for HMRC s functions. An HMRC official who wrongly disclosed taxpayer information could be liable to criminal prosecution if they breached their duty of confidentiality. HMRC is advised that parliamentary privilege would not necessarily offer, as the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content. Within these constraints, HMRC seeks to ensure that the PAC has the information and evidence it needs to carry out its role, on behalf of Parliament and the taxpayer, of scrutinising and holding the department accountable. In order to be as helpful as possible, HMRC officials will continue to provide information to the PAC about its activities and results in respect of particular sectors or groups of taxpayers, in so far as

141 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 117 that is possible without disclosing identities. HMRC assure me they will work with the Committee to try and meet any residual concerns Members may have in a way that does not undermine HMRC s commitment to taxpayer confidentiality, or breach its statutory obligations, including asking taxpayers for their consent to disclosure where appropriate. I would commend to you this pragmatic approach, respecting the law and the PAC s position and, at the same time, honouring HMRC s responsibilities to its employees and the public. I hope that you and the Committee will understand HMRC s reasons for seeking to provide information requested by Members in a way that protects taxpayer confidentiality I am not in a position to confirm the content of the letter sent by Sir Gus O Donnell to Mr Leigh but this draft letter is misleading on a number of grounds. Sections 18(2)(a) authorises disclosure of the PAC 4.28 In broad terms, section 20 of the CRCA (which Mr Leigh had referred to in his letter) permits disclosures of information in six sets of specified circumstances such as preventing or detecting crime, national security, public safety, public health and the regulation of professions. The purpose of the provision is to provide explicit statutory cover for disclosures that were previously made by HM Customs and Excise in the public interest on the basis of implied. 12 Thus a disclosure to the PAC would not come within the six sets of circumstances specified in section 20 but, as counsel advised, section 18(2)(a) of the CRCA authorises HMRC to disclose information to the PAC. No credible possibility of criminal prosecution under section 19 of the CRCA 4.29 The draft letter claimed that an HMRC official who wrongly disclosed taxpayer information could be liable to criminal prosecution if they breached their duty of confidentiality and stated that parliamentary privilege would not necessarily offer protection, as the offence is one of strict liability and as such it would only be necessary to give evidence of the fact of disclosure, not the content. However, where a legal basis for disclosure exists (as in the case of a disclosure to Select Committees under section 18(2)(a) of CRCA), the general prohibition under section 18(1) will not apply, and following from this the criminal sanction under section 19 (which potentially applies where there is a breach of section 18(1)) will not apply either Indeed, there are further grounds why a criminal prosecution for disclosing information to a Select Committee is highly improbable. First, as explained in greater detail in the attached paper, the criminal sanction under section 19 CRCA applies to wrongful disclosure of taxpayer confidential information but not to HMRC s official secrets, which the PAC requested. Secondly, section 19(3) provides a defence for a person charged with the offence to prove that he reasonably believed that the disclosure was lawful. Thirdly, section 19(5) and (6) provide that a prosecution for the offence under may be instituted in England and Wales only by the Director of Revenue and Customs Prosecutions or with the consent of the Director of Public Prosecutions and in Northern Ireland only by the Commissioners themselves or with the consent of the Director of Public Prosecutions for Northern Ireland In fact, there are no records of a prosecution for wrongful disclosure of tax information in the last 100 years because known breaches of confidentiality and official secrecy have either involved other elements of criminality (such as theft, corruption, fraud) or have been dealt with under the Civil Service Disciplinary Code. Therefore the possibility of the prosecution of HMRC s Chief Executive, who runs all aspects of HMRC s business and as the Principal Accounting Officer is accountable to Parliament for the Department s performance (or any other official acting on her behalf) for disclosing information to the PAC is so remote that it is misleading to have raised the spectre of prosecution in response to Mr Leigh s letter. Refusal to provide information to the PAC in confidence 4.32 It would be recalled that Mr Leigh suggested (Q83) that the requested information could be provided to the PAC in confidence if HMRC could not do so in public session. This request was declined. This opportunity for confidential disclosure was also spurned in the draft letter. However, the Cabinet Office guidance Departmental Evidence and Response to Select Committees known as the Osmotherly Rules restates the Government s commitment to being as open and as helpful as possible with Select Committees and emphasises that the presumption is that requests for information from Select Committees will be agreed to. If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, it requires Departments to consider whether the information requested could be provided on a confidential basis. These procedures for providing sensitive information in confidence states, amongst other things, that: 85. It is to the benefit of Committees in carrying out their task of scrutinising Government activities, and to Government in explaining its actions and policies, for sensitive information, including that carrying a protective security marking, to be provided from time to time on the basis that it will not be published and will be treated in confidence. Procedures have been developed to accommodate this. 12 See the Joint Committee On Human Rights Thirteenth Report.

142 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 118 Committee of Public Accounts: Evidence 86. When this arises, the Department should inform the Clerk that the information in question can be made available only on this basis, explaining the reasons in general terms. Such information should not be made available until the Committee has agreed to handle it appropriately, either by treating it wholly in confidence or by agreeing to publish it with a reasonable degree of sidelining (ie with the relevant passages omitted but with the location of the omissions indicated). It is important when submitting such information to make clear that the papers are provided in confidence and are not for publication. Information provided to Committees in confidence will be covered by Parliamentary privilege, and therefore will be exempt from release under FOI, but they will eventually be considered for release under the 30 year rule. In cases of particular sensitivity, Departments may wish to register a wish to be consulted before release. It should be appreciated, however, that once evidence is given to a Committee, whether in confidence or not, it becomes the property of the Committee, to deal with as it thinks fit. Clearer accountability recommended by Sir Gus O Donnell 4.33 As explained above, Chapter 6 of the Sir Gus O Donnell report that led to the formation of HMRC (Financing Britain s Future: Review of the Revenue Departments, Cm 6163, HM Treasury, 2004) contained the following recommendations: Clearer accountability to Parliament 6.37 For Parliament, there would be better clarity about who should be held accountable for which decision. As a result of this clarity, there will be a better opportunity to hold the relevant person to account In addition to appearances before the PAC, the Executive Chairman should be available to appear before the Treasury Select Committee (and other Select Committees as necessary) to account for decisions that his or her department has taken in exercise of their statutory duties, and for progress in achieving the PSA objectives and targets and Remits set for the Executive Chairman by the Chancellor. Ministers and Treasury officials will be primarily accountable for policy The Chancellor should usually ask the Executive Chairman to respond to: MPs letters on matters relating to the administration of the tax system; and written Parliamentary Questions relating to matters that are the Executive Chair s responsibility As at present, there will be a Departmental Report presented to Parliament in the spring. The new department will also produce an annual report to Parliament, published in line with Government reporting requirements and timetables. As at present, the Executive Chairman will also be responsible for making a Trust Statement to Parliament, accounting for revenue collected, remitted and written off, and any necessary provisions on an accruals basis, along with a Statement on Internal Control. Clearer accountability to taxpayers 6.41 The changes proposed in this review should help to bring the new department closer to its customers taxpayers, tax credit recipients, the travelling public, and others. The new department will be more focussed on its customers because: it should be more clearly established who is accountable to whom, for what, so taxpayers will have a better idea about who has taken which decision, strengthening democratic control; central control of the new department will be more strategic, providing more autonomy for the front-line to tailor services to meet customer needs.... more performance data should be in the public domain, giving citizens more scope to exercise their rights under the Open Government Code of Practice and Freedom of Information Under Freedom of Information, the new department will provide transparency of information about the performance of different parts of the taxation system, allowing citizens to hold it to account, and in particular to judge when service standard commitments are not being met. It is already possible, for example, to see the performance of Inland Revenue Enquiry Centres on the Internet. The experience of other public sector organisations is that transparency helps to drive performance improvements, to some extent replacing the need for detailed central target setting and monitoring 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 The implications of the non-disclosure policy of 2009 were thrown into sharp relief by the controversial Vodafone settlement and the dogged refusal by senior HMRC officials to provide information required to assure Parliament and the public that due process was followed in that case, purportedly for reasons of taxpayer confidentiality. The hearing before the Committee of Public Accounts on 16 th November 2010 (Public Accounts Committee Eighteenth Report HM Revenue and Customs Accounts) is very instructive and is set out in full below. HMRC witnesses were Dame Lesley Strathie DCB (Chief Executive and Permanent

143 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 119 Secretary), Sarah Walker (Director, PAYE, Self Assessment and NI Contributions) and Jon Fundrey (Financial Controller). Q192. Chair: I m going to move us on to something else. We understand that you have to keep personal tax information confidential, but the tax affairs of companies, particularly publicly quoted companies, are available, one assumes, to their shareholders. I therefore have a slight question about why we cannot discuss them here. It is a question of principle. I am not trying to trip you up on this one, Lesley. I can understand that you don t want to talk about my tax affairs to the Committee, but I cannot understand why we cannot have an open discussion about the tax affairs of a publicly quoted company in this Committee: Dame Lesley Strathie: We went through this with your predecessor. Chair: I know you did. I am quoting from a letter he got. Dame Lesley Strathie: It is quite important in terms of working with companies to crystallise liabilities and to bring tax in. It is for the companies themselves to discuss whatever they choose to discuss, but it is inappropriate for HMRC Q193. Chair: But they do disclose them to their shareholders, publicly. All companies do. Dame Lesley Strathie: But would they disclose the details of the settlement, or would they disclose to their shareholders what the number in their accounts was? Q194. Mr Bacon: In the case of Vodafone, it disclosed to its shareholders that following the agreement that it had reached with HMRC it was not expecting to be affected into the future by tax in the particular matter of a controlled foreign corporation. So, it did go beyond the number, didn t it, in the public domain? Dame Lesley Strathie: But that s for Vodafone. We did make a statement to which Vodafone gave us permission to add, which I can read if you want, but it has already been in the press. Chair: I think that we ve all seen that it s been in the debate. I don t think that it will help us, given that we re running out of time. Dame Lesley Strathie: I would just like to reassure the Committee though, that ultimately the commissioners have to make decisions, and I am satisfied as the accounting officer that the proper processes took place here. I think that in the Court of Appeal this was a huge success for HMRC; this is revenue that could potentially have been forgone. Chair: You re discussing the individual case there. Ultimately, our understanding is that the accounts could be qualified by the National Audit Office if it found that there was a question mark over whether sufficient revenue was collected from Vodafone. Q195. Chris Heaton-Harris: I was wondering whether you could extrapolate crystallised liability for me. I thought that if you were a corporation and you did something that was liable for tax you d probably end up paying it. So, is it just an aspiration of HRMC to get that tax? Do you immediately start in a negotiating position? I m slightly worried by the phrase crystallised liability. Dame Lesley Strathie: What I was referring to was not the detail of the Vodafone case. The Court of Appeal decision last year confirming the compatibility of a controlled foreign company s rules with EU law was an important success for HMRC. It paved the way for the settlement that was the point that I was making and it will pave the way for other settlements. Q196. Chair: You can t let us know the details of the Vodafone negotiations, but can you let us know how many companies you re currently discussing Chris Heaton-Harris: Crystallising. Chair: Crystallising, sorry disputed outstanding tax with, where the sum exceeds 250 million? Jon Fundrey: We intend to disclose in next year s set of accounts significant litigation in cases that we re going through, and we re working with the NAO on what form of disclosure we can make. Q197. Chair: How many? Can you tell us? They might not be in litigation. I never know. You might be negotiating outside litigation. How many companies are there that HMRC views at present as owing more than 250 million, and with which you re in discussions through to litigation. How many? Jon Fundrey: I don t have that information to hand. I m not sure that it would be appropriate for us to start disclosing the nature of that kind of case, but we are certainly Chair: No, we re asking for numbers. We re asking for numbers. Jon Fundrey: But we certainly intend to disclose in next year s accounts cases of more than 50 million that we re currently going Q198. Chair: Well, can you let us have that figure now? No one is saying, Vodafone, Vodafone, Vodafone, but they are asking, With how many companies are you in negotiation? Dame Lesley Strathie: I can offer the Committee a note in relation to that. We will give you the information that we can in terms of litigation strategy and the cases that we have in the pipeline. We ll give you as much information as we can. Q199. Chair: And can you also give us the information as to the quantity? Dame Lesley Strathie: Yes.

144 cobber Pack: U PL: COE1 [E] Processed: [ :07] Job: Unit: PG03 Ev 120 Committee of Public Accounts: Evidence Q200. Chair: Can I ask you one final question? Do you think that it s appropriate that someone who left HMRC in 2007 should, within a couple of years, be negotiating with an ex-colleague to settle a dispute about debt? As the boss of HMRC, are you happy with that situation? Dame Lesley Strathie: I m not sure what you re referring to. Mr Bacon: John Connors. He was an HMRC director, and he now works for Vodafone on tax matters and was negotiating with HMRC about Vodafone s tax liability, was he not? Q201. Chair: Do you think that that s appropriate? Dame Lesley Strathie: I don t know anything about that and it would be inappropriate for me to comment. I am very happy, if there are any issues on process, to take them back to the commissioners who dealt with this, and to our legal team. Q202. Chair: I don t think I am asking you a question completely out of the way. I don t know a lot about it either. I just read what I read in the press. What hit me in the face was that in my view it is completely inappropriate to have a negotiation of quite a sizeable potential outstanding debt between somebody who was working for HMRC, who has now gone to work for the company, negotiating with an ex-colleague within two years. Ministers wouldn t be allowed to do that. Dame Lesley Strathie: All I can say is there has been a lot in printed media on this that is inaccurate. I can t comment on that. Amyas Morse: Before you pass on, the Chair very kindly paraphrased something that I said quite carefully, qualifiedly, earlier on. Since you said it on the record, Chair, I can t let it go by. What I said was that there might be a case for qualifying on grounds of irregularity if it was seen that a decision had been made unreasonably. I did warn that I thought that that wasn t very likely. I think I am repeating myself fairly accurately. Thank you. Q203. Mr Bacon: Dame Lesley, may I just pursue this point? You raised the issue of the Court of Appeal case and the fact that that was a great success for HMRC, because it meant that your approach was compatible with European law and you could therefore continue to pursue people whom you deemed had a liability. Your litigation and settlement strategy is clear on that. Where you have a strong case you should seek full value from the settlement or take the matter to litigation. Where you have disputes that are of an all-or-nothing character that is to say, it is merely a question of whether the law applies or not such disputes should be settled on all-or-nothing terms. It goes on to say, Do not split the difference or offer any discount for an agreement not to litigate. Your own controlled foreign corporation specialists believed in the case of Vodafone that the absolute minimum that HMRC should settle for was 2.4 billion. You have referred a number of times to the issue of process. The process that concerns me and may concern others is that, instead of the HMRC s specialist in controlled foreign corporation law being consulted on the terms of a deal, it is done in private between your permanent secretary for tax, Mr Hartnett, and the company concerned in this case, Vodafone without the proper checks and balances that you would expect to see, or to ensure that the right advice from within HMRC, from those who knew about the details of controlled foreign corporation law was taken. That is the problem. Dame Lesley Strathie: I don t confirm any of that, Mr Bacon. I think it is quite important and I don t believe that any decision was taken in private. There comes a point when the commissioners have to decide what the right course of action is in the circumstances that they are in. The director general for business tax was the accountable commissioner in the first instance here, and the business tax senior management team. The permanent secretary for tax is the second commissioner. Then we have counsel, overseen by our senior legal team. It would be absolutely wrong to suggest in any way that the permanent secretary for tax did some deal in private. Q204. Mr Bacon: If I may continue for a minute. Going back to your point about processes, the issue is whether the people who knew what they were talking about with HMRC were consulted on the terms of the deal. That is a process point. It is a fact that the people who knew what they were talking about were not consulted on the terms of the deal. Dame Lesley Strathie: You are now getting into detail. I would only say in a general manner: there is a huge tendency when people have worked on something for a very long time to hope that they will finally have their day in court. There are many cases that have gone back for years and years, where they have still delivered nothing. Eventually they are part of a settlement strategy. Q205. Mr Bacon: Going back to your point, it is your settlement strategy that I was reading. It says: Such disputes should be settled on all or nothing terms. It is your settlement strategy that says on avoidance cases, If our legal advice is strong, do not accept settlements for less than 100% of the tax and interest due. Dame Lesley Strathie: But wouldn t that suggest to you that there was a number that was the tax liability due? That s the last word that I m going to say on the subject, or I am absolutely in danger of breaking taxpayer confidentiality. Q206. Mr Bacon: I wanted to ask you about David Cruickshank from Deloitte. Who brought him in HMRC, or Vodafone?

145 cobber Pack: U PL: COE1 [O] Processed: [ :07] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 121 Dame Lesley Strathie: You read that in the papers. Again, I said you shouldn t believe everything that you read in the press, Mr Bacon. Q207. Mr Bacon: Who brought him in? Dame Lesley Strathie: I don t know that anybody brought him in. Q208. Mr Bacon: It was Mr Hartnett who brought him in, wasn t it? Dame Lesley Strathie: I don t know that he was brought in. Q209. Ian Swales: My question is an extension of that one. It is to do with the control mechanisms. Who authorises such arrangements, especially the ones that fall between the public assessment, if you like, or the clear assessment that the staff would make, and litigation? In other words, what about those cases that fall in between? Incidentally, the Chair was asking for some data. I think it would be important to try and divide that between those cases greater than 250 million, where we think that there is litigation, and those greater than 250 million where we are in the period between assessment and potential litigation. My real question is about the control system. Who can agree to those huge sums of money going up or down? What is the management control? Dame Lesley Strathie: This is for the director general, business tax, and the senior management team. There then has to be another commissioner and we have to have legal advice. There is a considerable amount of process before we would ever get to an end result. Q210. Ian Swales: So if you were in a discussion about potentially settling a case I am not talking about this case, it could be any case and a figure of 100 million was being bandied around at a meeting, who would ultimately say, Okay, settle for that 100 million? Would it happen before the settlement was made? Dame Lesley Strathie: I wouldn t use those words. If we are having a hypothetical case, then you are striving for the liability. What is the proven liability? Then you might settle for 100% of it. Q211. Ian Swales: That would be the normal process. So you are saying that there are no cases that are settled differently? What Mr Bacon read out is the process it is the liability or it is litigation. Is that the case? Dame Lesley Strathie: Our job is to prove the liability, to serve that assessment and to collect the money. Q212. Mrs McGuire: Do you feel that sometimes, the bigger the organisation and the bigger the company, the more opportunity they have to negotiate? My experience in some situations has been that HMRC is pretty unforgiving when it comes to smaller organisations and companies in pulling back tax or national insurance. Dame Lesley Strathie: I think we have the same job to do for every customer large or small business, or individual. I think that global taxation, particularly for foreign companies, is very complex. A huge amount of our work is in nailing down what we believe the law was intended to do and what applies for the UK to protect the UK tax base, versus what other people would contend. That is the huge challenge. Our job is to protect the United Kingdom s tax base. Clearly, companies will have other drivers. Q213. Mrs McGuire: So you don t think that those who have privileged access, whether they are dealing with a national taxation issue or an international one, have greater opportunities to come to an arrangement, whereas smaller companies that find themselves in difficulty find it almost impossible to negotiate with HMRC in how they pay back money? Dame Lesley Strathie: We have absolutely proven, with the introduction of the business payment support service during the recession, that provided people came to us and told us that they had a difficulty, we would put in place time-to-pay arrangements. We have demonstrated that, and we have greater compliance. We are keeping the business payment support service, now that we are out of recession, because it allowed many more companies to come into a compliance regime and be given time to pay. The return on that has been very high. We have also demonstrated it in the PAYE reconciliation, where people had debts of more than 2,000. Provided that they come to us on receipt of that assessment we will give them up to three years to pay. We are applying the same for individuals and business customers. I don t believe that anybody, just because they re a large corporate, has the opportunity to come to an arrangement so far as liability is concerned. Any arrangement is around time to pay. Jon Fundrey: To give you some sense of scale, we have in place 371,000 time-to-pay arrangements covering 6.4 billion, and 90% of them are paying. Chair: Will you say that again? Jon Fundrey: We currently have 371,000 businesses in our time-to-pay arrangements, covering 6.4 billion. They have time to pay, but we are also collecting in excess of 90% of that at the current rate. I am using those figures to demonstrate that we also look after the other end of the market. Q214. Mr Bacon: Dame Lesley, you said that your job was to prove liability. Indeed, you had a Court of Appeal case that helped you in that. My belief is that having got that case on your side, you did not pursue things as strongly as you should have done. Dame Lesley Strathie: On what basis do you say make that assertion?

146 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 122 Committee of Public Accounts: Evidence Q215. Mr Bacon: On the basis that your CFC specialists believed that you could get more money than you did. My question is about forward agreements on tax treatment. They are unlawful, aren t they? Dame Lesley Strathie: I m sorry, but I am not a tax specialist. Q216. Mr Bacon: You can t tell me if forward agreements on tax are unlawful? Dame Lesley Strathie: No, but I would be very happy to find the information for you. Q217. Mr Bacon: Sarah Walker, can you tell me if forward agreements on tax are unlawful? Sarah Walker: I think you are talking about the sort of arrangement that Mr al-fayed had? Q218. Mr Bacon: Yes, that kind of arrangement. Sarah Walker: Those were found to be unlawful. Q219. Mr Bacon: Why are you still doing them with other companies? Sarah Walker: That s not my area; I am sorry I can t answer that. Mr Bacon: Mr Fundrey? Jon Fundrey: Also not my area. Q220. Mr Bacon: Vodafone said in its press release that it is not likely that CFC liabilities will arise in future, as a consequence of the likely reform of CFC rules due to the facts established in the agreement. My question is how can they arise now? Dame Lesley Strathie: Perhaps you should ask Vodafone what it meant by its statement. Mr Bacon: Perhaps we will. Q221. Stephen Barclay: Following on from that, where there is a legal process, who has the authority to vary it? We heard from Richard about the Department s guidelines. Who has the authority to vary them? Does it require your authority? Dame Lesley Strathie: I go back to the point about the commissioners. There are six commissioners in Revenue and Customs, and they cover different areas, but on any decision there will be a minimum of two commissioners. We will ensure independence and governance of that. I would never personally be involved in any of these decisions. It would come up the line with the permanent secretary for tax. Q222. Stephen Barclay: Sure, but we had an exchange at our last meeting about the vagaries of how accountability works and the role of the accounting officer. I want to clarify whether, as the accountable officer, you have to agree to variations. Dame Lesley Strathie: My job as principal accounting officer is to account for decisions that are made and who made them. It is not for me to make those decisions. Why would I? I m not a tax professional. Q223. Stephen Barclay: So you don t have to sign them off? Dame Lesley Strathie: No. Q224. Stephen Barclay: And how do you get oversight of potential conflicts of interest? Dame Lesley Strathie: Well, I very much hope, first and foremost, that if there was a conflict it would be self-declared and, if not, that our legal team and our governance would pick that up. Q225. Stephen Barclay: Right. That s not something you would actually look at. You rely on people selfdeclaring conflicts of interest. Dame Lesley Strathie: I have told you already that I have no role in the settlement of tax cases. Therefore, my job is to make sure that there is a process and that the process is governed. I expect the NAO to oversee that process also. I expect anyone in the permanent secretary or tax line to be working with the NAO on any of our approaches for that. In an organisation the size of mine, I can t do everything personally. Q226. Stephen Barclay: I appreciate that. One final thing. In terms of these firms always being major employers, one would understand there being other factors considered in terms of whether to pursue an aggressive strategy. Are you satisfied that this case was judged solely on the legal issues in dispute? Dame Lesley Strathie: I have absolutely no reason to doubt that proper process was followed in this case. Q227. Chair: It was followed? Dame Lesley Strathie: Yes. I have no reason to doubt that at all. Q228. Stephen Barclay: Were there no discussions with the company about impacts on jobs or other factors? Dame Lesley Strathie: I am not privy to that. I am protected from the taxpayer s confidentiality as well just as Ministers are. The detail and the discussions are not something that I am privy to It is the case that section 18(2)(h) of the CRCA permits a disclosure of HMRC information which is made with the consent of each person to whom the information relates but as Ms Strathie is fully aware, section 18(2)(a) equally permits a disclosure which is made for the purposes of a function of HMRC. Clearly, a disclosure of information by HMRC s Chief Executive qualifies as a disclosure for the purposes of a function of HMRC. In fact, as the particular exchange between Dame Strathie and the MP for South Norfolk shows, the information requested is not confidential information of Vodafone but HMRC s official secrets. Such

147 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 123 information is not protected by taxpayer confidentiality and would be subject to the provisions of the Freedom of Information Act. Thus the Osmotherly Rules require its disclosure to the PAC: 53. The central principle to be followed is that it is the duty of officials to be as helpful as possible to Select Committees. Officials should be as forthcoming as they can in providing information, whether in writing or in oral evidence, to a Select Committee. Any withholding of information should be decided in accordance with the law and care should be taken to ensure that no information is withheld which would not be exempted if a parallel request were made under the FOI Act. Oral Evidence to the TSC on 16 March At the hearing of the Treasury Sub-Committee on 16 March 2011, Mr Hartnett, who has long been aware that HMRC can disclose information lawfully to relevant Select Committees, suggested that he had only just became aware of that fact. The following exchange with the MP for Hereford and South Herefordshire is instructive: Q150. Jesse Norman:... Mr Hartnett, do you think the continued public controversy over the Vodafone case has damaged HMRC? Dave Hartnett: Maybe a little, Mr Norman. Can I preface what I want to say by saying that, before coming here today, I spoke at length to our lawyers because in the past we have normally, under taxpayer confidentiality legal strictures on us, refused to say anything about a particular taxpayer. I thought it might be helpful today if I could say something about the mistakes and misconceptions that are out there, because they are significant. I have legal advice that enables me to answer those questions, but I cannot answer detailed questions about the actual tax liability Furthermore, there was no indication from Mr Hartnett s evidence as to the factors he had taken into account in exercising the statutory discretion conferred on the Department under section 18(2)(a) of CRCA to disclose information to the Committee on that occasion The subsequent evidence, much of which has since been contradicted by information available in the public domain is set out hereunder for completeness: Q151. Jesse Norman: If the Chair is comfortable, I would be very interested in that. Thank you. Chair: The Chair is always comfortable. Dave Hartnett: Do you want to ask me some questions, Mr Norman? Jesse Norman: No, if you have a prepared statement. Dave Hartnett: I do not have a prepared statement but I have some notes for myself. Q152. Chair: How long is it, David? We only have a couple of hours. Dave Hartnett: Thank you, Chairman. I thought I might start with the 6 billion, if that was alright, because that seems to have captured the public imagination, but it is not a number we recognise. So I thought I would construct the 6 billion for you, very quickly how we think it was constructed and why we think it is simply wrong. The profits to which the 6 billion allegedly relates arose in Luxembourg from activities in Germany and Greece. The calculation is based on gross income, not on profit, so the calculation takes no account of non-taxable amounts tax losses, overseas tax paid and all the things you would normally set off in getting to a tax liability. There are a lot of roundings and extrapolations in it, and there is no attempt at all to analyse the controlled foreign company legislation and look at exemptions. Our view is that the 6 billion is frankly I hope this is not an inappropriate word absurd, and that no serious or reputable practising accountant in this country, be it public sector or private sector, would be able to endorse it. Q153. Jesse Norman: For the avoidance of doubt, it is much higher than the actual liability although you can t discuss what the actual liability was? Dave Hartnett: Vodafone put in the public domain the sum they paid, which we believe to be the actual liability, which is 1.25 billion. That is the real issue, Mr Norman, about the 6 billion. This is may I repeat myself? an absurd figure. Q154. Jesse Norman: Is there anything you want to add? Dave Hartnett: There are a few other things, if I can pick two or three things at random. There have been allegations, which we haven t felt able to counter before, that Mr Connors of Vodafone and I met regularly and in secret to cook up the deal. At no stage during my involvement with Vodafone did I meet Mr Connors. I never wrote to him. I never received a letter from him. I never had a text from him, or an e- mail, or telephoned him or received a telephone call. We had nothing whatever to do with each other. Secondly, I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter to the very best people in our organisation, the director of our international division and one of her deputies, and our lawyers were involved throughout. The third thing worth saying is that I think I have read somewhere that I brought Mr Cruickshank of Deloitte into the matter. No, not at any stage. Of course I know Mr Cruickshank, he is one of the country s leading tax accountants, but I did not bring him into anything. We don t do that.

148 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 124 Committee of Public Accounts: Evidence Q155. Jesse Norman: On that point, do you mean that you did not bring him in, or he was not brought in? Dave Hartnett: He came in, I think, at the request of the company. Jesse Norman: So the company brought in Deloitte? Dave Hartnett: Yes. We don t do that. Q156. Jesse Norman: He is someone with whom you have had no other relationship? Dave Hartnett: No. Over probably 15 years in tax I have seen him on many occasions, on many different matters, because he is one of the country s leading tax specialists. Q157. Jesse Norman: He has advised HMRC? Dave Hartnett: No. He has not advised us. He has always acted for taxpayers. Q158. Jesse Norman: I understand. Thank you for that. Can you tell us how the case was settled? What was the procedure by which you settled the case? Dave Hartnett: The director of our international division and her deputy began a negotiation with Vodafone and their advisors. When that stalled, I and another commissioner in HMRC became involved and negotiated a settlement with the chief finance officer of Vodafone. Q159. Jesse Norman: So it was a negotiation. It was not what you thought they actually had to pay, it was what you were prepared to settle for. Dave Hartnett: What we do most often, Mr Norman, is to negotiate the very best settlement we can. We had to balance out whether we were going to get more money for the country by litigating or more money by getting the right negotiation, and there were plenty of tax QCs in the UK lined up telling us and the media that we were not going to get a penny through litigation. Q160. Jesse Norman: How many large business corporate tax avoidance cases have you litigated or taken to the Tax Tribunal in the last five years? Dave Hartnett: Quite a lot. We protected through litigation last year most of this number will be big business about 6.25 billion. I am trying to find a list I have brought because I thought that it might be helpful. Can I just illustrate with one or two? Jesse Norman: The number that you have taken to the Tax Tribunal is the question I really want to get to. Dave Hartnett: I will have to let you have that in writing the number to the Tax Tribunal. But we have, across all our tax litigation, about 10,000 cases in litigation at any one time. Q161. Jesse Norman: But how many with what you might call your large business service? How many of those were litigated? Dave Hartnett: I can t give you a precise number but quite a lot of the 800 or so entities that are in there. Q162. Jesse Norman: Were the procedures you followed on Vodafone ordinary ones for a case of this kind? Dave Hartnett: There was nothing special about this case. It was worked by the most senior experts in the field, and two commissioners of HMRC. Q163. Jesse Norman: Are they board members? Dave Hartnett: Yes. It was me and the director general for business tax, and our lawyers were involved as well. Q164. Jesse Norman: Was there any difference of view as to how the case should be prosecuted as between the board members and the team involved? Dave Hartnett: Not once the case had been escalated. I think one or two of our colleagues not working on the case but elsewhere in the department felt that we should have said to everyone in the department how this case was progressing. When you think of the scale of it, this was incredibly market sensitive in terms of an amount of money, so we could not explain to large numbers of people how the matter was being dealt with, but it wasn t dealt with differently from other cases. Q165. Jesse Norman: In 2008, the Public Accounts Committee was very critical of the Revenue s failure to charge penalties to big businesses when they understated their tax payable. The number was about 15 million and the Revenue promised to do better. How much better are you doing now? Dave Hartnett: If better is in terms of amounts of money, the most recent year has been a lot less than that but the crucial issue is that in order to collect a penalty, there has to be at the very least a failure to take reasonable care. Most of the issues we resolve with big business in the UK are very significant differences of view on technical aspects of taxation, and we cannot charge a penalty in relation to those. Q166. Jesse Norman: The actual number is that six penalties were charged Dave Hartnett: I knew it was small. Jesse Norman: in 2009_10 for a total of 442,000, which was one one-hundredth of 1% of the tax that was under declared, which I have to say strikes me as a lamentable failure. It seems to me that it isn t better than you promised to do in It feels a lot worse. What is the equivalent percentage of tax under declared for small business?

149 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 125 Dave Hartnett: I don t know precisely, Mr Norman, but there is a fundamental difference. Small business in the UK makes up about 50% of the tax gap; big business makes up less than half of that. We have more evasion in small business than we do in big business. In fact I cannot remember maybe if I went away for a couple of hours I could think of something seeing a case of evasion in very big business in the recent past. The crucial issue Q167. Jesse Norman: Could you repeat that? You cannot remember having seen a single case of evasion by big business? Dave Hartnett: It is mostly avoidance, Mr Norman. Q168. Jesse Norman: I find that extraordinary, I must say. Okay. The equivalent rate for small business is about 200 times the rate for the large business service. If you fiddle your tax credits you go to jail, if you do it in a systematic and fraudulent way. Why are you so much less tough on big business? Dave Hartnett: I don t think we are less tough on big business. We will take penalties from big business Q16.9. Jesse Norman: It is 200 times lighter, the amount they pay relative to the tax that is under declared. That feels like pretty unequal treatment to me. Dave Hartnett: What we have to measure is the incidence of at least failure to take reasonable care, or worse, and that incidence is higher in small business than it is in big business. Q170. Jesse Norman: So just to round off, the situation is that you barely fine big businesses who underpay their taxes. You say you take them to the Tax Tribunal but I would be interested to see the numbers on that. Do you think you are offering a credible threat to big business, in line with HMRC s stated objective of charging people the right amount of tax and collecting it? Dave Hartnett: I do, because looking at the intervention yield, which I think Mr Clasper referred to earlier on, over the last four years we have increased that in relation to big business by more than 25%. If I look at the list of cases we have taken to the Tribunal this is all public domain information. Firstly, the Prudential in relation to tax-efficient off-market swaps was a very large avoidance case, which we have won. There were 30 other major companies behind that. They were not named but they funded, in part, the running of that case, so it was not a single case. We are still considering for some of those whether there is a penalty position. If I go back to the 15 million you mentioned earlier on, I happen to know one element of that 15 million rather well, and a large part of that 15 million was one case. Q171. Jesse Norman: In other words, when you can levy a good fine you do it? Dave Hartnett: Absolutely, and the advice we get from the private sector is that a big fine puts senior officials in big companies in serious jeopardy, and that is a very big deterrent. Q172. Jesse Norman: It does raise the question why you do not do more of it to more companies, given that when you do it, you can raise a reasonable sum? Dave Hartnett: Every time we settle an issue, Mr Norman, we look at the penalty position and if necessary we take legal advice; sometimes external legal advice. Q173. Jesse Norman: Do you think you have adequate transparency in the derivatives profits made in the big banks as to the tax creep of those? Dave Hartnett: Well, it has improved, very significantly. It has improved through the code of tax for banks that we drew up. The top 15 banks and another 190, roughly, have now signed up to that. Transparency is a key part of it, and we are monitoring that transparency very carefully. With a number of the biggest banks we now work in real time. If I can turn your question ever so slightly; do we necessarily understand all the derivatives? Maybe not as quickly as I would like. Jesse Norman: We know that in many cases, they do not understand the derivatives so that is not very surprising. Q174. Mr Love: Can I just come back to Vodafone briefly? How would you explain the widespread reports in the newspapers that Vodafone had set aside double the amount of tax that they actually paid? How did it come about that they estimated it much higher than you did? Dave Hartnett: I don t know how they made the estimation, Mr Love, but we frequently see very conservative provisioning in relation to tax; very conservative provisioning indeed, where it is massively more than the sum of money we could possibly collect under the law. We did not collect a penny less from Vodafone than we thought we could. Q175. Jesse Norman: That cannot be true because you have already said you negotiated. So you had an ambition for how much you wanted to take from Vodafone, which was thwarted by the company and then you went into a negotiation. So what you have just said cannot be true. Dave Hartnett: No. Mr Norman, with respect, I don t think I ever said that I had a figure. We looked at the position; we did our calculations during the negotiation and we reached what we thought was the right number. Q176. Mr Love: You indicated earlier that all the tax lawyers were telling you that Dave Hartnett: Half of them, Mr Love. Sorry.

150 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 126 Committee of Public Accounts: Evidence Mr Love: Well that is a slightly different impression than you gave originally, but the overwhelming view of those in the know was that you could not go to litigation. Vodafone would have known that as well. Are you seriously asking us to accept that Vodafone would have made a greater estimate than you about what their tax liability was? Dave Hartnett: My experience, Mr Love, is that happens regularly. If I can go to another matter, far enough away, to illustrate the point, I remember that we were pilloried in the media some years ago for not collecting every penny of tax under a provision. We couldn t get there. In law we could not reach the provision. But I think I ought to make way for Mr Clasper. Simon Bowles: If I may come in, just by way of introduction I have spent 30 years in the private sector, many years as a finance director in public companies, so it has been my practical experience that faced with a tax liability, one would try to be as conservative as possible because what you don t want is two surprises: first that you make a provision and secondly, you discover you haven t put enough aside and there is another shock coming. So my experience very much echoes what Dave has described. Mr Love: So the headline for tomorrow is, Vodafone got it wrong; they are even more incompetent than HMRC. Chair: David, do you want to come in in this area? Q177. Mr Ruffley: Thank you, Mr Chairman. Can I say, Mr Hartnett, that I think your opening statement has been very helpful to Mr Mudie s sub-committee. Can I just get one thing straight? You described the 6 billion figure in relation to Vodafone as an absurd figure, and I take it that you are saying that 1.25 billion was did you use the words real liability? Dave Hartnett: I don t remember using those words. Q178. Mr Ruffley: What was the 1.25 billion? How did you characterise that? Dave Hartnett: It was the actual amount of money for which the matter was settled. It was our largest ever cash settlement. Q179. Mr Ruffley: You are saying the 6 billion was absurd and you suggested that was because it was a gross income figure, and did not take account of exemptions under the Act or any other write-offs or losses, so that Dave Hartnett: Yes. Q180 Mr Ruffley: Okay. Just so I understand that. I take your point that you are trying your best. I certainly don t suggest like some rather cruel commentators that you have sold out to big business. I am not going to be as populist as that, but I have to say that some facts suggest that there is huge disquiet on the part of technicians in HMRC. Oral Evidence to the TSC on 11 May The lack of transparency in the rationale for HMRC s exercise of its discretion to disclose information to Parliamentary Committees was highlighted at the hearing before the Treasury Sub-Committee on 11 May 2011, particularly when the MP for Streatham questioned HMRC s Acting Director-General for Personal Tax about the Goldman Sachs settlement: Q408. Mr Umunna: Minister, before I move to Mr Banyard, because I have a couple of questions about a case of record, I noticed in the answer that you just gave that you said that you weren t consulted in relation to settlements in advance of them being made. Do I take it from that answer that after settlements come to perhaps the public s attention, you do then ask questions? There have been a range of written questions and answers, and also oral ones with, for example, the Member for Haltemprice and Howden, about this. Do I take it that you take an interest after the settlement and ask questions? David Gauke: Yes. HMRC will not and cannot provide to me information that is not in the public domain. But as I was saying earlier, I have regular conversations with senior HMRC staff and I would need to ensure that I am comfortable or that we can be comfortable with the position that has been taken within the constraints that exist, which are significant. So I have not sat down and had someone talk me through the Vodafone settlement, but nonetheless I, as you would expect, I would seek reassurance on the governance here and ensure that there is nothing that strikes me as being unusual or wrong. Q409. Mr Umunna: I will come back to you. Mr Banyard, can I just ask you about a case which has been reported, because it was heard in open court, and that relates to Goldman Sachs. For a 26-month period in the late 1990s, that investment bank set up an offshore vehicle to pay bonuses to their London bankers, and under the arrangement London staff who were employed by that vehicle were seconded to the London offices and essentially were employees and worked for Goldman Sachs headquarters here. That arrangement was subject to proceedings which were brought by well, which occurred between HMRC and Goldmans that started in and around December 2002 and continued through to the end of 2009, because HMRC was concerned that this arrangement was being used to avoid the payment of national insurance. Now, all that I have just said is a matter of public record and has been heard and discussed in open court, and there are various judgments in the interlocutory hearings which have formed parts of those proceedings online. Are you familiar with those proceedings?

151 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 127 Stephen Banyard: I am not particularly familiar with them, but the settlement terms are not in the public domain and I couldn t comment on them here. Q410. Mr Umunna: I am aware of that, and you will note that I have not asked you anything about the settlement terms. I have just asked you about the case so far. Just in terms of the arrangement that was the subject of those proceedings, which was an employee benefit trust, those were in operation in a number of other companies at that time. You, HMRC, also brought proceedings against them in relation to those arrangements, and again, all of those proceedings are a matter of public record. Now, you will note I have not mentioned the companies, I have not even cited the proceedings, but you will agree, or perhaps you could confirm that what I have just said is correct? Stephen Banyard: We have taken settlement agreements, or we have worked on EBT with other companies, yes. Q411. Mr Umunna: With respect to those companies, and these were companies with whom you had similar proceedings at around the same time as Goldmans, you successfully litigated those proceedings and settlements were reached in or around 2005, which secured the full payment of national insurance. Again, I have not named the companies and I have not cited the proceedings. I simply asked you to confirm that what I have just said is correct. Stephen Banyard: I believe so, but I would need to look into it in detail. Q412. Mr Umunna: Okay. However and again, this is a matter of record, because it is all in the Goldman s interlocutory hearing I have just referred to Goldmans refused to play ball over EBTs and so the proceedings in relation to them carried on for another four or five years. Again, that is all a matter of public record. I suppose this is a matter of public record, but you may or may not wish to comment on it, but the intention was in that case for Goldmans to use the EBT vehicle to avoid national insurance contributions in the sum of 23 million through a complex share purchase arrangement and, as it stood at the end of 2009, there was around 10.8 million worth of interest owing in addition to that. So we are talking around 40 million. Are you able to confirm any of that? Stephen Banyard: No. Q413. Mr Umunna: Could you perhaps tell us why, or could I perhaps invite HMRC to clarify what happened in that case, because there have been details of the settlement or leaked details in the media in relation to this particular issue. You will understand that insofar as the public is concerned and the people we represent are concerned, they would expect large corporates and wealthy individuals to be required to contribute to the Exchequer and meet their tax obligations in the same way as everybody else. Now, when your colleague, Dave Hartnett, has appeared in front of us before, and was, I think, questioned by Mr Norman in relation to the Vodafone case, obviously a view was taken within the organisation that there needed to be clarification to assure the public as to what the terms of that arrangement were. Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed? Stephen Banyard: I think the sensible thing would be for us to take that away and write to you. Q414. Mr Umunna: Could you perhaps just tell us Mr Ruffley asked about the people who decide upon the settlements just a bit about the process and the procedure involved in deciding whether to settle such cases? Stephen Banyard: I am not a member of the high-risk corporates programme, so I don t have first-hand knowledge of it. The settlements are settled at a level appropriate to the size and the complexity of the case and the precedent value. It might be at director level, director of a large business service, it might be more senior, depending on the size and the severity of the case. The processes followed are laid down. I can t personally tell you what they are here, but again, we could let you have a note which would tell you how we go about that. Q415. Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman s settlement? Stephen Banyard: We could do that in the letter as well. Q416. Mr Umunna: Thank you very much. Finally, can I just ask you, Minister, going back to the answer you gave me before in relation to taking an interest in matters that have arisen after settlement, because they become an issue of public interest, are you aware of the subject that I have raised this afternoon? David Gauke: I am aware that there are a number of press reports and press comments. Mr Umunna: That wasn t the question I asked. David Gauke: On this specific one, I have to say I have not had any specific conversations with HMRC staff about this particular matter. I have not Q417. Mr Umunna: So you are not aware of it? David Gauke: I think I am aware of issues with regard to Goldmans along these lines, but this is not a subject matter which I have discussed with HMRC senior management.

152 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 128 Committee of Public Accounts: Evidence Q418. Mr Umunna: Minister, you said that you speak regularly almost every day, it would seem to HMRC officials, including Mr Hartnett, who appears to, according to the report, have settled this case. Given that it is a matter of public interest and you meet regularly with the HMRC personnel I have just cited, why haven t you asked any questions about this particular case? David Gauke: I have discussed with HMRC the general governance and the arrangements as far as settlements are concerned with large corporates. I have had discussions that have been about the governance with regard to Vodafone and in advance of Mr Hartnett speaking to this Committee earlier in this year. I was aware that he was going to set out further details to this Committee, but I don t see it as my role to discuss each and every case just because there has been a press report critical of HMRC in that, as long as I am satisfied that the general approach taken by HMRC is the appropriate one. Q419. Mr Umunna: But isn t that a slight contradiction, because you did take an interest in Vodafone, you did ask questions about that, because it was a matter of public interest, and presumably if you will let me finish politically sensitive? I would say the same characteristics apply to the Goldman case. You have just confirmed you are aware of this and you are aware of these reports, yet you don t seem to have asked any questions in particular about this politically and publicly sensitive topic when it has come to your recent conversations with HMRC officials, one of whom has been named in connection with that particular case. David Gauke: I am conscious that a lot of allegations seem to be made on the basis of little or no evidence, as far as I can see. I also made the point that within the constraints that exist as far as client confidentiality is concerned I don t expect indeed, I am not entitled to be talked through details that are not in the public domain. I do have an interest in ensuring that the overall governance is correct, there is nothing that appears to be out of place, and I do that in a generic case, but I think it would be fair to say that on Vodafone, which has been a particularly high-profile case, I had further discussions, but again, no specific information was provided to me. Of course, in the Vodafone case there were more details that were in the public domain, but I am not in a position to comment on specific cases. Mr Umunna: But you have said that part of your job is to scrutinise and I would argue although you don t have operational responsibility for what happens at HMRC, insofar as the public is concerned, they will want to know that you are ensuring that there isn t one set of rules for wealthy individuals and very large corporates and investment banks and another set of rules for everybody else. David Gauke: Of course, but as I say, we have the NAO that is looking at the governance in this area. They are able to do that to a considerable degree of depth and we await their report in July. Mr Umunna: Thank you. Written Evidence to the TCS on 15 June The response promised by HMRC is contained in the written evidence dated 15 June 2011: 6. Q413: Mr Umunna: Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed? 7. Q415: Mr Umunna: Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman s settlement? HMRC has carefully considered the extent to which they can answer the questions asked and have concluded that they cannot give any information, for reasons of taxpayer confidentiality This terse written evidence is a clear breach of the Osmotherly Rules, which states that: 68. The Government is committed to being as open and as helpful as possible with Select Committees. The presumption is that requests for information from Select Committees will be agreed to. Where a Department feels that it cannot meet a Committee s request for information, it should make clear its reasons for doing so, if appropriate in terms similar to those in the Freedom of Information Act (without resorting to explicit reference to the Act itself or to section numbers). If the problem lies with disclosing information in open evidence sessions or in memoranda submitted for publication, Departments will wish to consider whether the information requested could be provided on a confidential basis It is instructive that there was no explanation as to why the written evidence of 15 June 2011 differs from the oral evidence given by Mr Hartnett to the TSC on 16 March There was no indication whatsoever as to the factors taken into account in arriving at the decision not to disclose information on this occasion. There was, once more, a misleading use of taxpayer confidentiality to withhold information as to whether the internal procedures were met in relation to the Goldman s settlement information that is not confidential information of Goldman Sachs. It would appear that HMRC has abused its statutory discretion on the disclosure of information In the Fleet Street Casuals case, Lord Scarman explained that the Revenue is subject to the writ of mandamus (now mandatory order) to compel performance of a public legal duty on all occasions where the law has established no specific remedy, and where in the interests of justice and good government there ought to be one. He said (at page 175):

153 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 129 It has... been recognised by the judges as a remedy for certain forms of abuse of discretion, upon the principle that the improper or capricious exercise of discretion is a failure to exercise the discretion which the law has required to be exercised: see Lord Mansfield C.J. in Reg. v Askew [1768] 4 Burr 2186 at pages , and, in modern times, Padfield v Minister of Agriculture, Fisheries, and Food [1968] AC Thus if any member of the public can approach the High Court of Justice to compel HMRC to exercise its statutory discretion to disclose information necessary for its duty of accountability a fortiori the High Court of Parliament that conferred the discretion on HMRC in the first place should be able to compel it to disclose this information. The powers of Select Committees to send for persons, papers and records relating to their field of enquiry are unqualified and authorise the PAC and the TSC to do this. Oral Evidence to the TSC on 12 September Nevertheless, the Select Committees have continued to deal with HMRC with utmost good faith which has not been reciprocated by the Department s leadership. On 30 July 2011 Treasury Committee published a report (Administration and effectiveness of HM Revenue and Customs Sixteenth Report of Session HC 731) which stated: 159. A particular source of controversy has been HMRC s settlement of large tax cases involving corporations. Allegations have been made in the press that cases have been settled inappropriately for a lower yield than might have otherwise been achieved. We pressed HMRC witnesses and the Minister on whether the appropriate processes had been used in two high-profile cases. Dave Hartnett, the Permanent Secretary for Tax, vigorously defended the procedures that had been used to achieve a settlement with Vodafone and argued that figures cited in the press lacked credibility. HMRC said they were unable to comment in relation to another high-profile case for reasons of taxpayer confidentiality We are not in a position to judge whether individual cases were settled appropriately or not. Nor are we challenging the need for taxpayers affairs to be kept confidential. However, the sums involved in some of these cases are enormous The National Audit Office has undertaken work on HMRC s procedures for resolving large tax cases, whilst the Committee of Public Accounts has already recommended that the Department should consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed The public needs to be assured that cases involving large sums of money are being settled correctly. Equally it is unfair on HMRC staff and damaging to public confidence that the Department can be the subject of repeated allegations it cannot refute, even if they are groundless. We agree with the Committee of Public Accounts that HMRC should consider how the accountability and transparency of the settlement of large and complex tax cases might be improved. We are taking further evidence on how this might be achieved However, despite this repeat by the TSC in July 2011 of the recommendation by the PAC in February 2011, at the hearing before the TSC on 12 th September 2011 (Administration and effectiveness of HMRC: closing the tax gap), HMRC maintained its unlawful policy of non-disclosure and deliberate misrepresentation. The following evidence speaks for itself: Q691. Jesse Norman: Mr Hartnett, the NAO talks about governance errors. What is a governance error? What does it mean in this case? Dave Hartnett: A governance error is where there is a process to oversee-i think in the context of the NAO, you are thinking of settlement of an investigation-and that governance does not happen in line with our processes. Jesse Norman: We are now back in Sir Humphrey world. Dave Hartnett: I am not. Q692. Jesse Norman: Perhaps you could be a little bit more explicit as to why the governance has not, in some case referred to by the NAO, gone in accordance with your processes. What does it mean to say that it has not gone in accordance with your processes, and why has that happened? Dave Hartnett: I think there are two cases that the NAO identified. There was one where a settlement was approved without the whole of the High Risk Corporate Programme Board being consulted before the taxpayer was told that the case was settled. In another, we reached a conclusion on an issue, not realising that an impediment to full application of the relevant law no longer applied and that the official responsible for taking that to the High Risk Corporate Programme Board did not initially realise that was necessary. The governance worked very well, because the High Risk Corporate Programme Board identified that issue. Jesse Norman: I have certainly misunderstood what you have just said. In the second case, what happened? Dave Hartnett: In the second case, there was a misunderstanding of a particular aspect of the law. Jesse Norman: Of the law?

154 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 130 Committee of Public Accounts: Evidence Dave Hartnett: Of the law. There had been an impediment, which had prevented the law being applied in a particular way, and the individuals involved in the case did not realise that that impediment had been removed. Q693. Jesse Norman: So they could have got more if they had not thought the impediment was there. Then it was discovered the impediment was there, and they then went and got the extra. Dave Hartnett: In this particular case, the matter was referred to the High Risk Corporate Programme Board later than it should have been-only by days-because the individual responsible for the case did not realise it had to go there. Q694. Jesse Norman: In the first case, where the board was not consulted- Dave Hartnett: Not fully consulted. Jesse Norman: Not fully consulted. What is the problem with that? Why is that an error of governance? Dave Hartnett: Because we have a process laid down, and it was not fully followed. Q695. Jesse Norman: I suppose I am asking why the process is the way it is. What problem is the process designed to guard against? Dave Hartnett: The process is designed to ensure that for cases under a particular amount of money, there is a broad oversight among our tax leaders of a proposed settlement. Q696. Jesse Norman: In other words, you do not want individual people going off and striking a settlement unless it has been properly shared. You do not want people running off and doing private deals. Dave Hartnett: Absolutely. Q697. Jesse Norman: Were you personally involved in doing this particular deal? Dave Hartnett: The one that was not approved by the whole- Jesse Norman: Yes. Dave Hartnett: No. Q698. Jesse Norman: That is helpful. Are we talking about the Goldman Sachs deal, just so I understand? Dave Hartnett: Mr Norman, you know I cannot answer that. Q699. Jesse Norman: Okay. There has been a deal done with Goldman, I think I am right in saying, in which they were- Dave Hartnett: I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I could not do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there was anything I could say about the newspaper reports on this, and they have said no. Q700. Jesse Norman: Take the case we are talking about. The error has now been put right, is that correct? Dave Hartnett: Mr Norman, there is huge speculation that the case referred to in the NAO report is Goldman Sachs, and my legal advice says I cannot say anything that adds to or detracts from that speculation. Q701. Jesse Norman: My last statement was not intended to be dispositive either way on that; it is just a question, which is: if there was a governance error, has the error been corrected, regardless of who the institution or not may be? Dave Hartnett: I am very sorry, but because of the huge media speculation that that second case is Goldman Sachs, I am unable to answer any questions. I do not want to be difficult with the Committee. I knew this would arise, and colleagues and I got legal advice to see what we should do. Q702. Jesse Norman: While we are on the issue, which you do not want to talk about and I do, have you ever had corporate hospitality from Goldman Sachs? Dave Hartnett: I have been to a supper with Goldman Sachs. I would not call it corporate hospitality from them. I went with a managing director from the Treasury to talk to about 20 chief finance officers from FTSE 100 companies about developments in tax policy and tax administration. Q703. Jesse Norman: Was any dispute with Goldman outstanding while you had this experience? Dave Hartnett: I knew nothing of Goldman s tax affairs when I was at that supper. I do not deal with Goldman s tax affairs. Q704. Jesse Norman: That is a helpful clarification. By extension, I assume you cannot talk about Vodafone, although we had a conversation about Vodafone when you were last in front of the Committee? Dave Hartnett: The advice I had then was that because there were a lot of non-issues in the media, I could correct those, and that is what I sought to do. Q705. Jesse Norman: That is helpful. One of the questions that has been put about the Vodafone settlement is that the Treasury never collected the interest owing on the tax that was payable. I forget if you addressed that issue last time; did it in fact collect the interest that was payable on the tax that was owing? Dave Hartnett: I am in the same place again, Mr Norman. Can I just say, I would really like to answer these questions for the good of our Department and to make clear my own position, but your interim

155 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 131 report in July made clear that the law really does not allow us to defend ourselves when it comes to having to talk about individual taxpayers? Jesse Norman: I am not seeking to attack you or anyone else. I just need to get the facts straight. Dave Hartnett: I understand that. Q706. Jesse Norman: For the record, you cannot clarify whether or not interest was charged on the tax that was payable. Let me ask another question: does the law require that interest be paid on tax that is owing? Dave Hartnett: Depending on the circumstances, yes. Q707. Jesse Norman: What kinds of circumstances would release HMRC from this obligation? Dave Hartnett: Let me try to give you an example, which I hope is helpful. One of the areas where we have not sought tax-i am just trying to find a note I wrote to myself on this-is in relation to certain controlled foreign companies, where following a change in the law on the taxation of overseas dividends in 2009, so that the majority of dividends paid by overseas companies were no longer taxable, we looked again at how certain exemptions applied. We discussed this with our own lawyers, other lawyers, and business extensively, and developed something called the new approach to CFCs. We consulted widely. This applied to the motive test in relation to the CFCs, so that where a company pays a dividend nowpost-2009-and elects to be taxed on it, and is therefore regarded as passing the motive test, no interest arises on that. I am sorry that is rather complicated. We can set it out in a letter, if that helps. Jesse Norman: That would be helpful, if you would. I am grateful for that offer and I accept it. Just to be clear, circumstances under which interest might not legally be required to be paid on tax owing are of the kind you describe. Dave Hartnett: There are others. Q708. Jesse Norman: In the case of Vodafone, this interest had been long-standing for a very long period of time, much later than It is absolutely opaque as to why the treatment of dividends would have any bearing. I suppose that may have been the cause of the tax that was owing? Dave Hartnett: I am feeling, Mr Norman, as though I am thwarting all your questions, but I cannot answer questions on Vodafone. I am very sorry. Q709. Jesse Norman: When you last came before us, you said that, in terms of avoidance, some 6.2 billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggesting a list showing 6.5 billion. Something like just under 6 billion of that was from fighting group litigation challenges. Only about 100 million was on corporation tax avoidance cases. That is 100 million out of the 6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunal since My question is: can that really be a decent response to issue of corporate tax avoidance, amounting to evasion? Dave Hartnett: I think, Mr Norman, the first thing I would like to do is look at the analysis of those numbers, because one case-we mentioned it at the last hearing, so it is in the public domain-prudential, which is about off-market swaps, has produced about 1 billion through the immediate case and the 30 or so following cases. The analysis you have given, which I have not made for myself, so I cannot really comment on now, is not right, in terms of the money that has flowed from some of those cases. Melanie Dawes: Can I add, Mr Norman, that on corporation tax, we also have a lot of other cases with large businesses that are following on from some of those cases? On VAT, it is more usual to find that each case has to be heard on its own merit, so you will find that there are often a lot of other companies standing behind what may appear to be quite a small number of cases but actually involves quite a large amount of tax. Q710. Jesse Norman: Thank you for that. You will know from previous discussions that I feel very strongly about the high penalties being imposed on small business, and the small penalties being imposed on large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages being charged in penalties and, of course, when you have a negotiated settlement, almost by definition there is no standard compared to which you can charge penalties, which build in a bias in favour of large companies, who can negotiate their terms of settlement, and against small companies. However, the Revenue is occasionally successful in these cases, and here is an example: Prudential had a scheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, there was no penalty charged at all, as far as I am aware, but there are countless cases-every constituency has them-involving small businesses in which HMRC is relentless in chasing large penalties on small business. I am just wondering why you are not charging penalties in cases like Prudential s. In 2008, you told the House that penalties from large businesses would increase, but in fact they have gone down, haven t they? Dave Hartnett: Yes, they have. Q711. Jesse Norman: Why should that be? That seems to me a pretty poor outcome. Dave Hartnett: We did touch on this at the last hearing. Jesse Norman: Let us talk about Prudential then. We do not need to expand on the point; I have made the point about the drop in paying penalties.

156 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 132 Committee of Public Accounts: Evidence Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that I know Mr Clasper wanted to make-i cannot remember whether he made it-is that evasion in large business, or dishonesty in relation to taxation, is something that we do not see very often; I certainly made the point first. In order to take a penalty from large business, we have to find that the law can be applied. With smaller business, there is more often dishonesty, or- Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with you with a bunch of numbers that they just want to get away with, and you make your way to a negotiation, it is hard to prove dishonesty, although they may have started miles away from where you were, in terms of negotiation. Dave Hartnett: We do search out for dishonesty and our investigators are very good at it. Over the years, we have often asked our criminal investigators and other specialist investigators to take up an inquiry into big business avoidance and search out the dishonesty. Q712. Jesse Norman: The Prudential case is a counter-example to that. I have here a copy of the legal report: HMRC win on mis-labelling (Tax newsflash, June 2009). It says that the Court of Appeal affirmed the judgment on the Prudential issue in favour of HMRC. You win the case; where is the money? They should pay the penalty. The Court of Appeal has found for you in this. It seems cut and dried that penalties should be paid. These people have attempted to get away with not paying, and they have been found out. Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appeal is not enough for us to be able to take a penalty. Q713. Jesse Norman: Is that because you fear that it may go to the Supreme Court, or is it because you simply regard a Court of Appeal judgment, uncontested or unreferred successfully, to be an insecure basis for charging a penalty? Dave Hartnett: No. A decision by the Court of Appeal, or indeed the Supreme Court, is not of itself enough to bring the case within the legislation that leads us to be able to charge a penalty. Jesse Norman: I would be very grateful if you could have someone write to the Committee on that. It seems to be an extraordinary thing. Dave Hartnett: Of course. Q714. Jesse Norman: We have procedures for deciding what is within the law. In some cases it is unclear what the law is. The judges make a decision; the people pay up.... Part Five: Conclusion 5.1 It is clear that the recommendations by the PAC and the TSC on HMRC to consider the scope for increasing transparency in the area of large and complex tax cases and for assuring Parliament and the public that due process in the resolution of these cases is being followed have not and will probably never achieve the desired result. It is equally clear that HMRC s Solicitor s Office and the National Audit Office cannot be relied on wholly to protect the public interest in regard to the provision of internal and external governance over the collection of revenue from the biggest taxpayers in the country by the Commissioners. 6 October 2011 Further written evidence from Osita Mba 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 this additional public interest disclosure. It has become necessary in light of significant inaccurate and misleading evidence given to your Committee in the course of the hearings on 12 October, 17 October and 7 November Summary 2. It is a fundamental constitutional principle that liability to taxation is a matter for Parliament. On the other hand, the powers of the Commissioners for Her Majesty s Revenue and Customs (HMRC) are limited to the collection of revenue (taxes, duties and national insurance contributions (NIC)). Therefore while Parliament has conferred the Commissioners with a managerial discretion as to the best and most practicable means of maximising revenue for the Exchequer, Parliamentary sovereignty over the imposition of liability to taxation places certain important limitations on this discretion. Some of these limitations are highly relevant to the recent evidence provided to your Committee and to the National Audit Office (NAO) s proposed re-examination of the Goldman Sachs and Vodafone settlements.

157 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 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 the exercise of their managerial discretion they cannot vary the quantum of accrued interest, which is determined by simply applying the appropriate statutory rate to the outstanding principal. However, the Comptroller and Auditor General of the NAO (C&AG) informed your Committee on 12 October 2011 that the accrued interest in 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 [ 10 million] (Q24). 4. However, as I explained in my memorandum, the quantum of accrued interest should be 20 million in rough figures (excluding penalty). Paragraphs 7 to 39 below demonstrate that the 20 million estimate is supported by a published Tribunal judgment (see Goldman Sachs International and Goldman Sachs Limited v The Commissioners for Revenue and Customs [2009] UKUT 290). That judgment also contradicts the following evidence 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 the hands 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 eventual settlement, and both HMRC and Goldman Sachs acknowledged publicly throughout the litigation that the dispute 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 Security Contributions (Decisions and Appeals) Regulations 1999 for NIC. The effect of the regulation 11 on the Goldman Sachs settlement was that although Mr Hartnett was authorised to shake hands on the proposed settlement on 19 November 2010, this informal agreement did not become binding on HMRC until it was set out in an exchange of letters initiated by HMRC on 22 February 2011 by the litigation lawyer on the orders of Mr Inglese. Paragraphs 40 to 58 below highlight the intervening events between these two dates, in particular the meeting of the High Risk Corporates Programme Board on 30 November 2010 and the meeting of the lawyers 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 respect of actual transactions. Thus it was held in Al Fayed and Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703, that the Commissioner s managerial discretion does not extend to entering into an agreement with a taxpayer as to his future tax liability. Paragraphs 59 to 68 below explain that if (as indicated by the MP for North East Cambridgeshire at your Committee s hearing on 7 November 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) issued notices of liability to NIC against Goldman Sachs International (GSI) on 12 December The liability comprised: (a) unpaid NIC in the sum of 23.2 million ( 7,295, for , 6,472, for , and 9,462, for ) and (b) accrued interest on the aforementioned liabilities to 12 December The liability related to bonuses paid to staff supplied to GSI by another Goldman subsidiary Goldman Sachs Services Limited (GSSL) which has its principal office address in the British Virgin Islands. On 13 December 2002, GSI appealed those decisions to the First-Tier Tribunal. The appeal was activated by GSI and GSSL (which had hitherto not been involved in the proceedings) in November 2008 by their request for a listing. On 9 December 2008, GSI and GSSL made a joint application in the restored appeal for a direction concerning 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 to those employees. But in June 1999 certain GSSL employees became direct employees of GSI. If GSSL was not present in the UK within the provisions of the relevant legislation (as argued by HMRC) then the company liable to pay the contributions was GSI as the host employer. On the other hand, if GSSL was present in the UK (as contended by Goldman Sachs) then it was liable to pay the contributions. However, in relation to the employees directly employed by GSI from June 1999, there was no dispute that GSI was liable to pay any contribution. 10. The First-Tier Tribunal rejected the joint application by GSI and GSSL for a direction concerning a preliminary hearing and the companies appealed to the Upper Tribunal. This appeal was heard on 21 October 2009 by Mr Justice Norris who allowed the appeal and directed the preliminary hearing. His judgement, which was published on 23 December 2009 (see Goldman Sachs International and Goldman Sachs Limited v The Commissioners for Revenue and Customs [2009] UKUT 290), contains a useful public record of the quantum of accrued interest at significant periods between 2002 and 2011.

158 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 134 Committee of Public Accounts: Evidence 10 December million 11. The Limitation Act 1980 prevents any action to enforce recovery of amounts due after six years from the 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, the Act places a time-bar on actions for recovery by HMRC of NIC due after 6 years from the date on which the liability arose. In order to prevent this effect of the Act on Goldman s liability in this case, HMRC issued a claim 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 than six years from the date on which the liability arose) on the basis that since HMRC instituted the County Court proceedings against GSI but not GSSL HMRC would be time-barred from recovering the NIC liability should the 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 Court claim in this passage: GS had apparently suggested the principal might be 16 million. Discussing whether this altered things. DR pointed out that the claim form and probably the Particulars of Claim in the County Court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. 14. However, the details of the claim had already been disclosed in the judgment of Mr Justice Norris referred to above (Goldman Sachs International and Goldman Sachs Limited v The Commissioners for Revenue and 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 million of unpaid NIC and interest. In other words, as at 10 December 2003, the accrued interest on the unpaid NIC principal of 23.2 million was 7.61 million. 31 October million 15. By the time of the 2005 settlements, the accrued interest had increased to 10.8 million. Thus on 7 October 2005, the relevant HMRC Officer in the then Special Civil Investigations (SCI) now Special Investigations (SI), wrote to the Managing Director of Goldman Sachs International (Mr Housden, who would have been involved in the settlement reached by Mr Hartnett on 19 November 2010) stating, amongst other things, 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 the offer to yourself as well. The offer of a negotiated settlement is open until 5pm on Friday 9 December For the avoidance of doubt, please note that should litigation be necessary to resolve matters then interest will continue to accrue on the principal NIC debt.... 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 Appendix to letter dated 7 October 2005 Year NIC Due Interest to 31/10/ ,295, ,079, ,472, ,032, ,462, ,704, Total 23,230, ,815, In the event, Goldman Sachs rejected the offer and interest continued to accrue on the NIC liability as advised 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 the date the offer was rejected, which would have been a deviation from settled law and practice. However, this appears be what the C&AG and Mr Hartnett implied when they informed your Committee on 12 October 2011 that 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 February 2011) may be slightly smaller than 10 million but this amount does not include the 10.8 million accrued as at 31 October Having rejected the 2005 settlement offer which the other 21 companies that used the avoidance scheme accepted, Goldman was not entitled to a release from the payment of the 10.2 million accrued at the date of the 2005 offer.

159 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev You will recall that during your Committee s hearing on 17 October 2011, Mr Hartnett gave this very significant 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 charge interest 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 last week. 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 the hands of 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 confident about 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 so confident about the nature of that impediment? Dave Hartnett: Well, because I had not been running the case, but those with me had, and between us 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 interest would run that the interest would continue to roll up and be due if it did not settle with the other 21 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 collecting interest in 2005, and which he and the head banking sector and the case relationship manager (who were not part of the legal team running the case ) and someone from Goldman Sachs believed to exist in 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 the principal sum and not a dispute about interest is inconsistent with the judgment of Mr Justice Norris which, amongst other things, stated (see paragraph 7 above) that: On 10 December 2003, HMRC commenced proceedings in the Central London County Court seeking repayment of some million of unpaid NIC and interest. 22. Indeed, subsequent passages of the judgment show that neither HMRC nor Goldman Sachs believed that the 10.8 million interest accrued as at 31 October 2005 was waived or that there was any legal impediment either to its recovery or to the recovery of future interest. 21 October million 23. At the hearing in the Upper Tribunal on 21 October 2009, Goldman Sachs put the accrued interest at 17 million. Thus in reference to the preliminary issue set out in paragraph 9 above, Mr Justice Norris made 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 not GSI was the contributor), is entirely distinct from the question whether the scheme worked. If it established by the preliminary issue that GSSL was the contributor, then the question of liability of GSI (ie whether the scheme worked) only arises in relation to the GSI employees for the nine months following June That liability represents only about 25% of the total liability to NIC sought to be imposed by HMRC. 19. Mr Goldberg QC for GSI says that at that level, namely 10 million instead of 40 million in 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 17 million (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 this preliminary argument when it was heard in the First-Tier Tribunal on 17 and 18 December In his judgement published on 26 April 2010 (see Goldman Sachs International v HMRC [TC00507]), Judge David found (in paragraph 105) as fact that GSSL was the foreign employer and that GSI was the host employer of the two named individuals throughout those parts of the period relevant to these appeals when GSI was not directly their employer.

160 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 136 Committee of Public Accounts: Evidence 26. Therefore the accrued interest, which amounted to 17 million in October 2009, should increase in line with the relevant statutory rates in the period between the 2009 hearings and 22 February 2011 when the case was 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 million in rough figures ), the C&AG s assertion that the accrued interest 16 months later was between 5 million 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 above show that (contrary to Mr Hartnett s claims that there was a legal impediment to collecting interest in 2005 and that the litigation was over the principal sum and not about interest) it was public knowledge that the litigation was over both the principal sum and the accrued interest throughout. 22 February million 29. As explained below, the date of settlement was 22 February 2011 (or more precisely whenever Goldman accepted HMRC s written offer of that date). The accrued interest at this date would be 20 million in rough figures (comprising the 10.8 million accrued from 12 December 2002 to 31 October 2005 plus the accrued interest from 31 October 2005 to 22 February 2011). Therefore the NIC liability and accrued interest 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 that because the interest was not considered, as it clearly should have been, the settlement would necessarily have fully reflected that in increased quantum does not appear to reflect accurately the law or HMRC s practice given 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 a passage that further undermines Mr Hartnett s contentions that the litigation was about the principal sum only and 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 will contemplate only capitulation to its present demands. It says that there is no question of settling with GSI in respect of GSI s liability for the GSI employees because it has already settled with 21 other taxpayers and to settle with GSI would not be consistent with the terms it offered those other 21 taxpayers. There is accordingly no question of a settlement, even a settlement on harsher terms than those put upon the other 21 taxpayers. What is required is complete capitulation. Mr Goldberg QC s publicly stated position in relation to GSI is that GSI is certainly willing to settle and that, if it wins the preliminary issue, it may well, though no decision has been taken and no offer is made, capitulate on 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 Goldman Sachs s appeal to the Upper Tribunal, HMRC s lawyers obtained further confirmation from Malcolm Gammie QC 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 was expected from Goldman Sachs by those running the case. However, Mr Hartnett appeared to have settled the case for 23.2 million without consulting them thus incurring a loss to the Exchequer in unrecovered interest in 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% of the 43 million liability. However, unlike interest which is fixed, any penalty would have been subject to negotiation. Indeed, to paraphrase the C&AG s statement (which should properly apply to penalty rather than to interest in the circumstances of this case): If the penalty had been on the table, it does not follow that because the penalty was not considered, as it clearly should have been, the settlement would necessarily have fully 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 apparent inconsistencies in his account regarding the lost interest at your Committee s hearing on 17 October 2011, Mr Hartnett s only recourse was the NAO (Q35): if the NAO is going to look at the matter, it should all come out 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 their report covered the Goldman Sachs settlement. However, it is pertinent to note that despite my public interest disclosures 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 the Programme Board. The Board identified a financial error, demonstrating its value as a check on settlement proposals.

161 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev The fact that this financial error was not corrected resulting in loss to the Exchequer was not apparent in the NAO s report. Indeed, the report concluded (in paragraph 2.35) that they did not identify any instances where [the Commissioners discretionary powers to forego the collection of tax] were exercised inappropriately. 37. Moreover, as noted above, the C&AG went to great lengths in his evidence to your Committee on 12 October 2011 to play down the cost to the Exchequer of this financial error by, amongst other things, reducing the accrued interest from 20 million to between 5 million and 8 million and then to 5 million. 38. Since the C&AG has announced (Q October 2011) that they would put [themselves] in a position 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 in more 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 taxpayer after 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 our report- 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 the belief that interest was applicable or mistakenly thinking that interest was not applicable. The range of the error-not simply the amount of tax that might have been involved-that it is reasonable to give is between 5 million and 8 million. However, and having been a tax person myself many, many years ago, negotiating much smaller settlements-i have never negotiated anything of this size-i know that a lot of factors will be involved in this settlement. If the interest had been on the table, it does not follow that because the interest was not considered, as it clearly should have been, the settlement would necessarily have fully reflected that in increased quantum. Q122 Chair: Did the taxpayer get value for money out of the settlement that was made with Goldman 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 factors is taken into account and there is give and take. If it was really an open-and-shut negotiation-forgive me-i am talking from very out-of-date experience. If it was really open and shut, it would be open and shut. It is not as simple as that. There must be a sustainable argument on the side of the taxpayer if there is any prolonged negotiation. Q124 Mr Bacon: Can I just pick up on that very point? Twenty-one of the 22 scheme users realised that it was open and shut and paid up. The litigation and settlement strategy is very clear. We had this conversation with Lesley Strathie last year on this very point. Where the character of the case is all or nothing, and the question is merely, Does the law apply or not?, the strategy says clearly that you should settle for 100% and you should not take down. They took down, in circumstances where it was quite clear that interest was applicable. Not only that, HMRC had actually warned Goldman Sachs that if it persisted in resisting, which it did for five years with a lot of spurious arguments in front of the tribunal with stooge witnesses, that interest would be liable. HMRC itself had told Goldman Sachs that interest would be liable; that is the context. Amyas Morse: Well, not necessarily. Setting aside for a minute whether we are talking about Goldman Sachs, if in a multi-factor settlement there was an admitted mistake in taking into account entitlement of interest, I am simply making the point that if you say, That amount of mistake is exactly the amount of tax lost, it is a little bit simplistic. There was a composite settlement. I think that is all I can say. Q125 Matthew Hancock: Are you saying that the cost due to this mistake is 5 million to 8 million? 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 in determining the quantum of the loss to the Exchequer in accrued interest and penalty on the Goldman Sachs settlement. B. The Processes that Led to the Goldman Sachs Settlement 40. Regulation 11 of the Social Security Contributions (Decisions and Appeals) Regulations 1999, which applies to the Goldman Sachs settlement, provides as follows: Settling of appeals by agreement 11. (1) Subject to the provisions of this regulation, where before an appeal is determined by the tribunal, an officer of the Board and every person who has appealed against the decision come to an

162 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 138 Committee of Public Accounts: Evidence agreement, whether in writing or otherwise, that the decision under appeal should be treated as upheld without variation, as varied in a particular manner or as superseded by a further decision, the like consequences ensue for all purposes as would have ensued if, at the time when the agreement was come 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 appeal in 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 all persons 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 the decision 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 agreement was come to, and the terms agreed, are confirmed by notice given by the officer of the Board to the appellant and any other person who has appealed against the decision or by the appellant or 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 be construed 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 2010 in the exercise of his managerial discretion, regulation 11(4) ensured that this informal agreement was not binding on HMRC until the fact that an agreement was come to, and the terms agreed, was confirmed in writing. As explained below, this happened on 22 February 2011 when litigation lawyer wrote to Goldman Sachs 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 the High Risk Corporates Programme Board on 30 November 2010 and the meeting of the lawyers on 8 December 2010, against this legal background. Informal Settlement on 19 November At your Committee s hearing on 12 October 2011, Mr Hartnett stated that he went to Goldman s offices on 19 November 2010 to assist [his] colleagues (namely the head of our banking sector in the large business service and the case relationship manager with the bank... who were managing the issues ) to deal with a very difficult relationship issue (Q16 Q17). However, he ended up shaking hands on the ongoing litigation without consulting the lawyers running the case, none of whom was present at the meeting. Consequently, as the 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 two mistakes. There was one financial error, and there was a mistake made in not reporting the case instantly 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, if not 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 the authority of the sector lead and the case relationship manager to reach. Over the weekend following the settlement, the sector lead began to realise that it was not within his competence to do that. That was the other mistake, and it was referred late to the high-risk corporate programme. 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 in the issues. Q247 Mr Bacon: That sounds familiar, actually-not consulting people who are familiar with the issues. So that was the second mistake: the deal was not reported immediately. The first mistake was what 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?

163 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 139 Dave Hartnett: Yes. Q249 Mr Bacon: Whereas you actually could. In coming to the conclusion that you could not charge interest, 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 the Goldman Sachs settlement, it is necessary to highlight these rules, as set out in the Litigation and Settlement Strategy and the High Risk Corporates Programme, in order to obtain as full a picture as possible of the events surrounding the settlement. Litigation and Settlement Strategy (LSS) 46. The 2007 LSS (the LSS was recently refreshed ) emphasised (in paragraph 13) that settlement terms must be consistent with the reasons for undertaking an enquiry in the first place, which are to influence taxpayer behaviour positively and to challenge behaviours that contribute to the tax gap. Thus while that version of the LSS clearly anticipated that deals would continue to be done, it set out a number of principles which must be applied 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 be decided one way or the other by the courts, with no middle ground. Such disputes should be settled on all-or-nothing terms: do not split the difference or offer any discount for an agreement not to litigate. Where there are good grounds to believe that negligence or evasion is involved (i) settlement terms must not allow these behaviours to be rewarded by financial gain and so must include a best estimate of the tax and interest due (ii) Do not undercharge tax, interest or penalties in the interest of quick settlement, even if doing so would provide a good return on time spent on the case. Always consider whether settlement terms do enough to promote positive customer behaviours and deter non-compliance. In avoidance cases (i) do not assume the facts are as described in the scheme. Check for implementation failure and always consider a penalty if an avoidance scheme fails because it has not been implemented correctly; (ii) if our legal advice is strong, do not accept settlements for 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 out a 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 complies with the Litigation and Settlement Strategy. Clearly, this requirement was not met in reaching the Goldman Sachs settlement. High Risk Corporate Programme (HRCP) 48. The C&AG s report also describes the processes applying to the largest disputes under the HRCP as follows: 2.12 The Department has five Commissioners, who have ultimate responsibility for collecting and managing tax revenues. In practice, Commissioners are normally only directly involved in signing off the settlement of the largest tax disputes For disputes dealt with outside the Programme, the Customer Relationship Manager is initially responsible for bringing together the relevant specialists in resolving tax issues. The Department encourages these parties to reach consensus on how the issue should be resolved but, if they cannot agree, then the issue is escalated to the relevant Directors for a decision There are defined procedures for signing off settlements for cases within and outside of the Programme. For cases outside the Programme where the tax under consideration is less than 100 million, agreement must be reached between the relevant stakeholders. Since November 2009, cases must be referred to the Programme Board before settlement where the tax under consideration exceeds 100 million, and there is a proposal for the Department to concede one issue or more, or to accept less than 100 per cent of the total tax under consideration, or where the case and issues are particularly sensitive For companies within the Programme, the decision is taken by the Programme Board if the tax under consideration exceeds 20 million for one issue or 50 million for a combination of issues in a 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 stakeholders cannot reach consensus. The Programme Board must reach a consensus on the matters referred to it; it does not take decisions by majority. Any issues where the Programme Board cannot reach a consensus are referred to Commissioners for sign off.

164 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 140 Committee of Public Accounts: Evidence 2.19 All individual issues where the tax under consideration is more than 250 million, or where there is potential for adverse national publicity or for questions to be raised in Parliament, or which represent a significant departure from previous policy, must be signed off by Commissioners. In practice, two Commissioners are required to sign off settlements, usually the Permanent Secretary for Tax, as the Department s senior tax specialist, and the Director General for Business Tax The Department has established teams of specialists for taxes, aspects of taxes and policy and legal matters and has processes for involving relevant specialists in considering each tax dispute. The requirement for consensus among these specialists, and defined procedures for escalating issues where agreement 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 settlement was reached, which all the HMRC people (including Mr Hartnett who set up the HRCP) believed to be within the authority of the sector lead and the case relationship manager to reach, and over the weekend following the settlement, the sector lead began to realise that it was not within his competence to do that ; yet on 22 February 2011 this flawed, non-binding settlement was completed by HMRC s lawyers. The HRCP Board Meeting of 30 November 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 Programme Board] explained that at the High Risk Corporates meeting the previous week a late submission had come in about a deal on which DH had shaken hands with GS. The status of this agreement was not clear. 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 might be protected, the interest might not. At the meeting of 8 December 2010, the litigation lawyer corrected this misrepresentation: 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 about the proposed settlement. As the HRCP Board must reach a consensus on the matters referred to it and does not take decisions by majority (see paragraph 2.18 of the C&AG s report), it appears that the settlement was not 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, and Q333 to 337 of the evidence taken on 7 November 2011) on 7 December The Meeting of the Lawyers on 8 December Mr Inglese informed your Committee (Q339) that: On 7 December, I started to gather information. I convened meetings on 7 and 8 December. The note of the meeting of 8 December 2010 shows that the information 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 broadly positive 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 thus recoverable. ( A brief note was prepared for the meeting including at pt 3 a suggestion that, whilst the NIC principal might be protected, the interest might not. DR said this was not correct; it was all covered, per his note ). (c) Details of the 2005 settlement and the lack of clarity on the details of the proposed settlement. ( It was not clear whether DH had settled on 24 million or on whatever the principal was. There was discussion about whether there could be justification for settling without interest, especially in view of the Litigation [and Settlement] Strategy. A particular concern was the 2005 ExCom settlements with all the other scheme users. AI asked if there was a risk of that being re-opened ). (d) Conduct of Goldman Sachs in the litigation. ( It was however, clear that the proposed settlement gave GS 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 Housden was the obvious person to answer questions. ) 55. Furthermore, Mr Inglese would have been aware that under regulation 11 of the Social Security Contributions (Decisions and Appeals) Regulations 1999 was no binding agreement, as the proposed settlement was yet to be confirmed in writing. Final Settlement of 22 February As General Counsel and Solicitor, Mr Inglese is responsible for all legal services to HMRC and for corporate governance. It is clear that the proposed settlement was in breach of both HMRC s corporate governance rules and the law (the courts have established in cases such as Commissioners of Inland Revenue

165 cobber Pack: U PL: COE1 [O] Processed: [ :08] Job: Unit: PG03 Committee of Public Accounts: Evidence Ev 141 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 to the 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 not binding at the time (Q313 to Q322), his legal advice to Mr Hartnett (having obtained the information set out above during the meeting with the litigation lawyers on 8 December 2010) was You can go back, or you cannot 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 relevant written confirmation to Goldman Sach s lawyers, requesting their signed copies. By virtue of regulation 11 of the Social Security Contributions (Decisions and Appeals) Regulations 1999, the deal on which Mr Hartnett shook 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 s hearing on 7 November 2011 in relation to the Vodafone settlement: Q586 Stephen Barclay: I think the quantum is much more important than Goldman Sachs. Between 2001 and 2011, as far as Vodafone is concerned, we are looking at in the region of 25 billion in profits. The settlement the 30%; obviously, it came down in the latter years seems strange on a number of levels. First, it includes the 2011 and 2012 profit, but given that the settlement was reached in 2010, 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 about 20% of Vodafone s profits. That means the Exchequer may have lost around 8 billion in 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 Fayed and Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703, 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 Mohammed Al Fayed. Three successive agreements were entered into with Mr Al Fayed in 1985, 1990, and 1997 under which Mr Al Fayed would pay, and the Revenue would accept, a specified sum in respect of designated future years 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 to and provided for payment of a sum of 240,000 per annum which represented an indexation of figures in the earlier agreements in 1985 and 1990 to take inflation into account. 62. The Revenue had not sought legal advice, either internally or externally, before entering into any of the three agreements. In May 2000, the Revenue received the opinion of counsel, which was to the effect 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 it was ultra vires but that in view of the history of the arrangements the Revenue would not re-open the issue of liability to tax prior to 5 April However, for the years from 6 April 2000 onwards Mr Al Fayed was required to complete tax returns in accordance with his normal statutory responsibilities, and without reference to the 2007 agreement. 64. Mr Al Fayed appealed this decision but his argument that the Revenue was obliged to abide by the agreement did not find favour with the Scottish courts. Upholding the decision of the Outer House of the Court of Session in favour of the Revenue, the Inner House held that the agreement was ultra vires. According to Lord Cullen: [73] Under taxation legislation the respondents [the Inland Revenue] have the duty of collecting tax as it falls due in respect of actual transactions.... The respondents have no power to require a taxpayer to accept an advance assessment of his liability to tax in a future year or years. Likewise they have no power to contract with the taxpayer as to his future liability (see Gresham Life Assurance Society v. Att-Gen.). [74] Next, even if the sum to be paid under an agreement between the respondents and the taxpayer was a reasonable estimate of the taxpayers liability at the outset of the period covered by the agreement, it could not be taken as a measure of that liability throughout the period.... In these circumstances we accept the respondents argument that such an agreement would involve a failure on the part of the respondents to exercise their managerial discretion, in the words of the Master of the Rolls in R (Wilkinson) v. I.R.C., to which we have referred earlier, as to the best manner of obtaining 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 whereby the Revenue negotiate a settlement with the taxpayer in relation to periods already ended, but this was rejected by the courts. In a passage that appears to be particularly relevant to the Vodafone settlement, Lord Cullen said this:

166 cobber Pack: U PL: COE1 [E] Processed: [ :08] Job: Unit: PG03 Ev 142 Committee of Public Accounts: Evidence [76] A back tax agreement relates to a situation in which the taxpayer has already incurred the tax liability, but its amount has not been determined. Fundamental to the legality of such an agreement is that the respondents have the power to require the taxpayer to pay what is due. As an alternative means to the same end they are regarded as having the power, in the exercise of their managerial discretion, to enter into a contract with the taxpayer for a payment in satisfaction of that liability. In that context they have power to arrange a compromise with the taxpayer, taking into account such factors as may be relevant. The fact that such an agreement is within the powers of the respondents cannot confer on them a power to enter into a forward tax agreement which otherwise would be ultra vires. Combining the two agreements in a single document, or agreeing that one is to form a consideration 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 be unfair 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, the respondents did not have any discretion to continue to abide by the Agreement once they knew that it was ultra vires. A decision taken at that stage to continue to be bound by the Agreement for the remainder of its contractual duration would, in our opinion, have been outwith the powers of the respondents. However, under our domestic law a legitimate expectation can only arise on the basis of a lawful promise, representation or practice. There can be no legitimate expectation that a public body will continue to implement an agreement when it has no power to do so. In our opinion, the petitioners could not have had a legitimate expectation that the respondents would have adopted a course of action which was outwith their powers, and continued to maintain a contract which was unlawful. 67. The difficulty identified by the MP for North East Cambridgeshire, namely: how to determine Vodafone s profit for 2011 and 2012 in 2010, illustrates why forward tax agreements cannot be a lawful exercise of the Commissioners 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 of the larger settlements, probably with the benefit of some tax advice, it should be noted that if there was a forward tax agreement on the Vodafone settlement, it would remain ultra vires and not binding on HMRC even if the terms of settlement are not unreasonable. Regardless of their terms, forward tax agreements are by their nature unlawful. Conclusion 69. In conclusion, it is worth remembering that, just like the Commissioners, the C&AG has the discretion, by virtue of section 182 of Finance Act 1989, to disclose information provided to the NAO by HMRC 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 renew the assurance of my highest consideration. 21 November 2011 Printed in the United Kingdom by The Stationery Office Limited 12/