Weekly Tax Update - Tuesday 3 January 2012

1. General news

   1.1. Public Accounts Committee report into HMRC's handling of tax disputes

   The Public Account Committee (PAC) has released a hard-hitting report criticising HMRC's handling of tax disputes.

   The PAC's conclusions and recommendations are as follows:

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 fulfill 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 fulfill 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 judgment 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 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 judgment. 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...