The State Displays Self Loathing

When it comes to self loathing, no one and nothing does it better than politicians and the State; especially when they viciously turn on one of their own departments.

Therefore it should come as no surprise whatever to read the "public damnation" of HMRC by the Public Accounts Committee.

PAC Chairman, Margaret Hodge, expresses "righteous anger" at how HMRC handles tax disputes with large corporations and the specific and "systemic failures" within HMRC.

PAC, ever mindful that the government is skint (and desperately needs money in order to keep itslef in the style to which it has become accustomed), expresses outrage at the £25BN of uncollected tax.

For good measure, PAC also lambaste HMRC for trying to maintain confidentiality and for not being transparent.

Well, all of these criticisms may well be valid. However, may I make a few observations from my humble perspective of being a "mere citizen" and not a politician:

1 HMRC is the product of the politicians, in terms of its structure, budget and how it is managed (eg politicians appoint the senior mandarins etc). Therefore the "buck" stops at the feet of the politicians, when it comes to apportioning blame for the failure of HMRC.

2 Has HMRC only just now started "doing deals" with major corporations?

I think not!

This has always been standard practice, the corporations and HMRC "negotiate" a settlement in order to minimise the costs and time spent in a protracted legal battle that neither side is certain who will win.

Why now are politicians (some of whom serve on the boards of large companies) expressing surprise at this and becoming excised over this?

3 To hear politicians bemoan the lack of transparency in an organisation is akin to watching a dog trying to walk on its hind legs.

Hypocrisy writ large!

4 The failings of HMRC are the product of a botched restructuring, poorly skilled senior managers, poor quality training, misdirection of resources, the politicisation of HMRC and an unduly complex and cumbersome tax system etc etc. All of these issues come firmly back to roost in the crow's nest of the government (Labour and Tory administrations alike).

Until the politicians "fess up" to the fact that they are responsible for this failed state "enterprise", nothing will improve.

Here is the summary of the report:

"The Commons Public Accounts Committee publishes its 61st Report of the Session which, on the basis of evidence from the Cabinet Office and HM Revenue and Customs (HMRC), examined tax disputes.

• Report: HM Revenue and Customs 2010-11 Accounts: tax disputes
• Public Accounts Committee

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"This report is a damning indictment of HMRC and the way its senior officials handle tax disputes with large corporations. We uncovered both specific and systemic failures which must be addressed.

There is more than £25 billion outstanding in unresolved tax bills and it is essential that there should be proper accountability to Parliament for the settlements reached by HMRC.

Having looked at the two cases in the public domain, we are concerned that many millions of pounds may be lost to the public purse.

It is extremely disappointing that senior HMRC officials were not prepared to cooperate with our inquiry in a spirit of openness. We accept that there is a need for confidentiality to protect individual taxpayers, but this must not be used as a cloak to protect the Department from scrutiny.

It is absurd that we had to rely on the media and the actions of a whistleblower to find out about the details of individual settlements. Parliament and the public have legitimate concerns that large companies are being treated more favourably than ordinary taxpayers, whether they be small businesses or hard-working families.

The Department's working practices must be seen by the taxpaying public to be absolutely impartial. The impression being given at the moment is quite the opposite, of far too cosy a relationship between HMRC and large companies.

In several cases, HMRC chose to depart from its normal governance procedures. It is extraordinary that the same officials who negotiated deals also approved them. In one instance, a mistake led to a potential £20 million of interest on a tax liability not being collected. Parliament and the public must be assured that settlements do not short-change the Exchequer."

Margaret Hodge was speaking as the committee published its 61st Report of this Session which, on the basis of evidence from the Cabinet Secretary and HM Revenue & Customs (the Department), examined tax disputes.

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 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 one 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."

Here is HMRC's response:


HM Revenue & Customs (HMRC) has today responded to the report of the Public Accounts Committee into tax disputes. An HMRC spokesman said:

“HM Revenue & Customs rejects the conclusion of the Public Accounts Committee that there are systemic failures in the management of tax disputes. The report is based on partial information, inaccurate opinion and some misunderstanding of facts.

HMRC's internal processes are robust and this was confirmed by a recent review by the National Audit Office of large business settlements. We agree that public confidence in our processes is important, and as we have already informed the Public Accounts Committee we propose to make further improvements to our governance and to increase transparency about our work with large business. We also welcome the further review that the National Audit Office is to carry out as an opportunity to confirm this and clear up the concerns about foregone millions.”

In response to the specific criticisms, the spokesman said:

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

2. “more than £25 billion outstanding in unresolved tax bills”
“We explained to the Committee and again in a letter to the Committee Chair in November that this figure is a ballpark estimate of maximum potential tax liabilities, before a full investigation of the specific facts has taken place, 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. Tax under consideration is an administrative tool to help us to focus our resources on cases where potential tax liabilities appear to be greatest. It is not tax owed.”

3. “many millions of pounds may be lost to the public purse”
“HMRC’s job is to bring in the tax that’s owed and that’s what we’re doing. We collected a record £468 billion in taxes last year, including more than £13 billion extra from our compliance work. We drew the NAO’s attention to an error in a single case which they then estimated to be between £5 and £8 million.

4. “a mistake led to a potential £20 million of interest on a tax liability not being collected”
“We do not agree this figure. We drew the attention of the Comptroller and Auditor General to an error, which he then estimated as between £5 million and £8 million.

5. “it is extremely disappointing that senior HMRC officials were not prepared to cooperate with our inquiry in a spirit of openness. We accept that there is a need for confidentiality to protect individual taxpayers, but this must not be used as a cloak to protect the Department from scrutiny…It is absurd that we had to rely on the media and the actions of a whistleblower to find out about the details of individual settlements.”

“Senior HMRC officials sought to be co-operative by providing as much information as possible within the legal constraints of taxpayer confidentiality under which they work. Taxpayer confidentiality is a legal requirement, fundamental to tax administration in the UK and across the world. Parliamentary scrutiny is delivered via the NAO to whom HMRC provide unfettered access to all their papers.”

6. “Parliament and the public have legitimate concerns that large companies are being treated more favourably than ordinary taxpayers… “
“HMRC treats all taxpayers even-handedly, supporting the majority who comply with their duty to pay their taxes, and cracking down hard on evaders, avoiders and fraudsters.
“It is wrong to suggest that HMRC officials are too lenient on large businesses. Large businesses pay around 60 per cent of total UK tax receipts, and account for more than half of the £13.9 billion additional compliance revenues that we brought in last year.
“Large business tax settlements are a vital part of how HMRC secures tax revenues for the country and without them Britain’s public finances would be seriously damaged. HMRC's large business strategy is now being adopted by other tax administrations around the world.

7. “in several cases, HMRC chose to depart from its normal governance procedures. It is extraordinary that the same officials who negotiated deals also approved them.”

“We have already informed the Committee of the action we have taken to ensure that in any case where an HMRC Commissioner has been involved in negotiations, the settlement decision is made under a ‘dual key’ approach by two different Commissioners. We have also written to the Committee with proposals to further strengthen our internal governance. These further changes will be agreed with our new Chief Executive in the New Year.


Tax does have to be taxing.

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