9. Mapeley noted that approximately 90 per cent of
its capital for STEPS was provided by overseas investors and that,
regardless of Mapeley's structure, Mapeley's investors are subject
to their respective taxation regimes for any benefits arising
out of their investment in the Mapeley Group.
Mapeley also told us that on an operating basis the economics
of the contract are marginal for the company. As a result, Mapeley
shareholder returns rely upon capital gains on the valuable properties
towards the end of the STEPS contract term. Accordingly, Mapeley
"structured its tax affairs to minimise exposure to Capital
Gains Tax and thereby reduce the charge to the Departments. This
is absolutely standard in the investment world where offshore
investors own property in the UK. Mapeley has operated entirely
within both the letter and spirit of the law."
10. The Departments told us that the STEPS procurement
followed standard arrangements which provide "for the exclusion
of bidders where they have not paid their tax or are (or have
been) involved in tax evasion. There are no other grounds on which
bidders can be excluded. The procurement process was ... subject
to three community law provisions and one WTO agreement:
Article 83 of the EC Treaty (freedom of establishment),
Article 49 of the EC Treaty (freedom to provide
Public Services Contracts Regulations 1993
(SI 1993 No.3228), which implemented an EC Directive on public
Under the auspices of the World Trade Organisation,
the Government Procurement Agreement 1994.
Following advice from leading Counsel, Inland Revenue
lawyers (who were not involved in the procurement process) have
recently asserted that the practical effect of these measures
prevented the Departments including a provision in the procurement
process to outlaw the use of an offshore tax structure by bidders."
11. Government policy is to reduce tax avoidance.
We asked the Inland Revenue whether the structure adopted by Mapeley
for the STEPS contract involved tax avoidance. Sir Nicholas Montagu
told us that "... lawful [tax] avoidance, in other words
avoidance within the scope of the law, cannot under European or
World Trade Organisation rules be taken as a reason for discriminating
against a bidder. That is a rule which applies right across Government
and "... for us to have discriminated against the Mapeley
bid because the properties were being transferred to a company
in Bermuda would have been unlawful."
He also told us that he did not think it was correct to describe
it as tax avoidance in this case,
noting that "if you are an overseas company you have no liability
for UK Capital Gains Tax. Therefore these are companies without
12. The Inland Revenue was not able to tell us whether
Stamp Duty had been paid by Mapeley on the purchase of these properties
as it does not comment on the affairs of individual taxpayers.
Mapeley subsequently stated that "... Stamp Duty was paid
on the transaction in accordance with the relevant legislation.
The amount paid was subsequently approved as a matter of routine
by the Stamp Office."
13. We also asked the Inland Revenue why the advice
they had obtained from Counsel, on whether procurement law prevented
excluding bidders from using an offshore tax structure, had not
been obtained before the contract was signed. Sir Nicholas Montagu
told us that " ... it was not necessary ...Government lawyers
right across Whitehall tell their departments that the European
procurement law and World Trade Organisation rules do prohibit
discrimination on the grounds of lawful tax practices. When interest
in the Mapeley contract was evident in the media and more widely,
and it became clear that your Committee would take an interest,
we thought that it was wise ... on belt and braces grounds to
seek advice from leading Counsel, which confirmed the view of
Government lawyers across Whitehall."
14. The project team did not explore with Mapeley
whether the consortium was prepared to own the properties through
a UK company in the Mapeley Group.
Sir Nicholas Montagu admitted that the project team could have
explored this option, but noted that "they were working within
European regulations, which say that an overseas structure is
no reason for discrimination"
and that "even if the properties had been transferred to
a UK based company, at the point of transfer nothing in the contract
could have prevented a restructuring of the consortium to transfer
them before any point of disposal to an offshore company."
15. We note the Inland Revenue's view that it
is not correct to describe the offshore structure adopted by Mapeley
for the contract as tax avoidance. But on the basis of Mapeley's
own evidence to the Committee it had "structured its tax
affairs to minimise exposure to Capital Gains Tax ..." Tax
avoidance was clearly one of Mapeley's objectives in the way the
deal was structured.
16. We accept both that Mapeley was entitled to
minimise its tax liabilities and the evidence that the avoidance
of tax in this case was legal. However, we consider that the Inland
Revenue, responsible for implementing the Government's policy
of reducing tax avoidance, should of all departments have been
alert to the difficulties of being party to a deal that transferred
ownership of its properties to an offshore company. We are concerned
that these difficulties were not recognised at the time. We regard
the fact that the project team did not explore with Mapeley the
possibility of an alternative structure to the deal that might
have avoided them as a failure in the way the project was handled.
17. We were told that even if the properties had
been transferred to a UK based company, nothing in the contract
could have prevented a subsequent restructuring of the consortium
to transfer them to an offshore company. While this may be the
case, this argument ignores the tax liabilities that could arise
for a company resident in the UK transferring assets offshore.
18. The Departments maintain that procurement
law prevented them excluding bidders from using an offshore tax
structure and that this was confirmed recently by advice from
leading Counsel. We recommend that procurement guidance be reviewed
to ensure that it contains comprehensive advice on this matter.
19. We also recommend that further advice is sought
and published so as to clarify whether it is possible to exclude
bidders using an offshore tax haven in similar circumstances,
and to restrict final beneficial ownership to companies registered
in countries that have signed the agreement on Government Procurement.
In particular, advice should be sought as to whether specifying
this exclusion in the tender advertisement makes it lawful. We
further recommend that the Treasury explores whether adjustments
should be made to contract bids to reflect loss of tax revenue
as we believe is the practice in the United States.
20. The Departments told us that Mapeley disclosed
its intention to adopt a corporate structure with some of its
companies resident outside the UK in a letter in November 2000
to the Departments' legal advisers that was forwarded to the Departments'
procurement team. The first reference to a company registered
in Bermuda was in an e-mail sent by Mapeley's lawyers to the Departments'
lawyers on 7 December 2000 which also referred to plans for the
Departments' freehold and long-leasehold properties to be held
in another Mapeley company also to be incorporated in Bermuda.
The corporate structure of Mapeley was an item on the agenda of
a meeting attended by officials from HM Customs and Excise, the
Inland Revenue, their legal and financial advisers (Lovells and
Deloitte & Touche), and Mapeley and its legal advisers. The
Departments' representatives on the project team subsequently
said that "they saw no reason to mention the offshore arrangements
to more senior colleagues as they were legal, and not prevented
by the procurement rules."
21. The Board of Inland Revenue learnt of the offshore
structure a few days before contracts were due to be signed. The
Departments' financial advisers, Deloitte & Touche, who had
been asked to explain Mapeley's tax arrangements, reported on
1 March 2001 that "the structure was familiar to the commercial
world and that it was the kind of arrangement which they would
expect from professional overseas investors. They said that they
had not seen anything to create alarm. Specialists in the Department
looked at the structure and confirmed that it was a conventional
arrangement used by non-residents that could not be challenged
under tax law. The Board took the view that there were no grounds
in the established procurement process for refusing to sign the
Broadbent told us that the Customs and Excise Management Committee
were not informed of Mapeley's offshore structure before the contract
was signed. Similarly,
at the time the contract was signed, the Paymaster General had
not been told that Mapeley STEPS Limited was registered in Bermuda.
22. We asked how the Board of the Inland Revenue
came to learn of the offshore structure a few days before the
contract was signed. Sir Nicholas Montagu explained that "at
the point where the Board of Inland Revenue were preparing to
give their agreement and to sign, at that point we asked (to be
precise my deputy on the policy and technical side asked), knowing
that arrangements of this sort were common, what the structure
of the Mapeley companies was."
23. We questioned whether the joint project team
had kept senior management sufficiently well informed on the negotiations
and the form of the proposed contract. Sir Nicholas Montagu told
us that the project team had been focussing very much on operating
within the procurement rules laid down by the Treasury and that
"at worst the charge against them is one of naivety in not
... [flagging up Mapeley's offshore structure] as something which
could be presented against ... [the Departments] at a later stage."
He also told us that if the exercise was repeated he "would
expect the outcome of the procurement to be the same because it
was conducted in an exemplary way in accordance with the rules."
The failure to inform the Minister was "a pure and simple
oversight. I have apologised to the Paymaster General ... we should
have warned the Paymaster General because again it was something
which could be misrepresented. Had we told her, again it could
not have made any difference to the ultimate outcome."
Mr Broadbent told us that he thought the project team should have
told the Customs and Excise Management Committee about the offshore
structure of the contract and that " ... it is regrettable
that they did not."
24. A joint Inland Revenue and Customs and Excise
press release of 9 March 2001 announcing the signing of the contract
referred to the estates being transferred to Mapeley Ltd, a UK
registered company, rather than Mapeley STEPS Ltd which is registered
in Bermuda. The information was subsequently corrected in an Inland
Revenue statement issued in September 2002. The Annual Report
and 2000-01 Resource Accounts of the Inland Revenue refer to the
transfer of buildings to a UK incorporated company, Mapeley STEPS
Contractor Ltd, instead of Mapeley STEPS Ltd. The Customs and
Excise Annual Report also refers to the signing of a contract
with Mapeley Ltd. The Departments told us that they "regret
that incorrect company details were shown in the original press
release, accounts and report. It seems the officials producing
these documents focussed on Mapeley as a consortium or Mapeley
Ltd, the bidding vehicle, rather than individual companies in
Sir Nicholas Montagu characterised these events as pure mistakes
"for which we have apologised and set the record straight
25. The Board of the Inland Revenue was not informed
by the project team that, under the contract, the Revenue's properties
would be transferred to a company registered in Bermuda. The Board
appears to have discovered this fact a few days before the contract
was due to be signed only because one of its members, knowing
that arrangements of this sort were common, asked what the structure
of the Mapeley companies was. The Customs and Excise Management
Committee and the relevant Minister, the Paymaster General, were
not told of the offshore structure of the contract before it was
signed. We reject the proposition put forward by the Chairman
of the Inland Revenue that at worst the charge against the project
team is one of naivety, a view we believe is complacent. We view
with great concern the fact that such failures in briefing senior
management and the Minister have occurred. We expect the Departments
to have identified exactly where and how things went so seriously
wrong and to have taken the necessary steps to prevent a recurrence.
26. A joint Inland Revenue and Customs and Excise
press release in March 2001 announcing the signing of the contract,
and the Revenue's Annual Report, wrongly refer to the transfer
of the estate to a UK incorporated company rather than one registered
in Bermuda. These errors were not corrected until September 2002,
some 18 months after the initial mistake. Customs and Excise's
Annual Report refers to the wrong company as the STEPS contractor.
Parliament and the public rightly expect information provided
by Government departments to be accurate. In this case errors
have been made in describing the contract on several occasions.
While we acknowledge that the Departments have corrected their
previous statements, this standard of performance is not acceptable.
1 Ev 4, paras 2.1, 3.1, 3.9 Back
Ev 5, paras 4.1, 4.4, and Ev 26, para 3 Back
Ev 2, para 2, and Ev 4, para 3.6 Back
Ev 5, paras 4.2, 4.3 Back
Q 4 Back
Ev 2, para 7 Back
Ev 27, para 16 Back
Ev 26, paras 1, 19, 21 Back
Ev 28, para 23 and Ev 30, Annex 2 Back
Ev 27, paras 16, 18 Back
Ev 28, paras 24, 25 Back
Ev 4, paras 3.3, 3.4 Back
Q 51 Back
Q 17 Back
Q 20 Back
Q 43 Back
Q 44 Back
Qq 5--64 Back
"Statement re Treasury Sub-committee Hearing", Mapeley,
13 December 2002, www.mapeley.com Back
Q 38 Back
Ev 5, para 5.3 Back
Q 46 Back
Q 51 Back
Ev 5, para 5.1, 5.2 Back
Ev 5, para 5.3 Back
Ev 5, para 5.4 Back
Q 24 Back
Ev 5, para 5.4 Back
Q 28 Back
Q 29 Back
Q 30 Back
Q 32 Back
Q 31 Back
Ev 5, paras 5.4, 5.5 Back
Qq 52-55 Back