NAO Publishes Settling Large Tax Disputes

In May I wrote that I had been advised by the National Audit Office (NAO) that their delayed report into "HMRC's Sweetheart Deals" ("Settling Large Tax Disputes") would come out in the beginning of June.

Well, here we are on 14 June (midway into the month) and the NAO have published their report.

The report into five major tax settlements by HMRC, including deals with Goldman Sachs and Vodafone, concludes that the final payments were “reasonable and the overall outcome for the exchequer was good”.

However, the report criticises HMRC for:

-failing to follow strict official processes,
-for refusing to consult its own lawyers before agreeing to drop litigation, and
-for weak internal communications that bred a climate of suspicion within the department.

The latter point is most certainly true, as it chimes with the regular comments/feedback from HMRC staff on this site and their emails to me; it is good that the NAO have picked this issue up and drawn attention to it. However, as to whether there will be an improvement within HMRC remains to be seen.

HMRC are quoted by the Telegraph:

“We welcome today’s report. 

We have always maintained that the settlements represented good value for the UK.”

The phrase "welcome today's report" rather makes me smile and brings back memories of when I ran an internal audit department, for whenever anyone used that phrase to me they invariably meant that they were really pissed off that their shortcomings had been brought to the attention of others.

Notwithstanding the NAO report and vindication of Dave Hartnett, UK Uncut have been granted their day in court to challenge HMRC's decision on Goldmans. This decision will be subjected to a judicial review, where HMRC said it “will strongly contest” UK Uncut’s application to quash the settlement.

Whatever the outcome of that review Margaret Hodge, chairman of the Public Accounts Committee, has also flagged the issue of processes being bypassed and internal communications failures:

"This report confirms my committee’s concerns about the uncontrolled way that HMRC has been doing secret deals with large companies. If the final settlements in these cases were reasonable, as Judge Park has concluded, questions still remain over why officials bypassed the proper processes.

With billions of pounds of tax at stake it is extremely worrying that the department failed to involve its own specialists in the final negotiations and follow its own rules by settling for less than it could have won in litigation."

Here is the summary of the report

"On the basis of Sir Andrew Park’s reports, I conclude that the settlements reached by HMRC in these five cases were all reasonable. Moreover, in settling them, the Department successfully resolved multiple, long-outstanding tax issues.

However, our concerns over the processes by which the settlements were reached have been confirmed. It was not appropriate to set up governance arrangements specific to certain cases or to fail to apply processes correctly. Poor communication with staff also undermined confidence in the settlements."
Amyas Morse, head of the National Audit Office, 14 June 2012

The National Audit Office has concluded, on the basis of an examination by former High Court tax judge Sir Andrew Park of five large tax settlements, that all five settlements were reasonable and the overall outcome for the Exchequer was good. However, the spending watchdog has expressed concerns about the processes by which the settlements were reached and over poor internal communication of the reasons for settlement.

The NAO review of the settlements followed serious concern by the Public Accounts Committee about how HM Revenue & Customs had handled them or overlooked governance arrangements. The NAO also examined the basis of concerns expressed by whistleblowers.

According to today’s report, all five settlements were reasonable for the Department to have reached under the circumstances and at least one may have been better than reasonable. These large settlements are complex and there is no clear answer to what represents the ‘right’ tax liability. In each case, there was a range of justifiable positions the Department might have taken. The NAO’s examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option.

Specialist staff were sometimes excluded from the final settlement negotiations and the Department did not always ensure that these staff involved understood the reasons for settlement. Poor internal communication of the reasons resulted in a loss of confidence in the settlements, both internally and externally.

It is not clear that all settlements were fully compatible with the Department’s Litigation and Settlement Strategy. For instance, there are some disputes where the only possible outcomes are either that the taxpayer owes nothing or that it owes the full amount. In these circumstances, the Department’s Litigation and Settlement Strategy does not permit ‘splitting the difference’. In one settlement, the Department settled for less than if it had won in litigation.  This was reasonable, given the costs and uncertainties of litigation, but was not clearly compatible with the Strategy.

In most cases, there was no need to seek legal advice before agreeing settlement terms. In one case, the Department did not consult its lawyers when it should have done because there was ongoing litigation.

The findings of today’s report confirm the NAO’s concerns regarding the governance arrangements operating in these cases. The Department has acknowledged that its governance processes need strengthening and is introducing new arrangements, including the appointment of an assurance Commissioner, who will approve all large settlements.

As ever, comments and opinions from loyal readers are very welcome.

Tax does have to be taxing.

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