Select Committee on Treasury Fourth Report


The Treasury Committee has agreed to the following Report:



1. The Treasury Committee established a Sub-committee in July 2001 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. As part of this work we decided to undertake a short inquiry into the handling of the joint Inland Revenue and HM Customs and Excise STEPS PFI project. We heard oral evidence on this from Sir Nicholas Montagu, Chairman, Inland Revenue, and Mr Richard Broadbent, Chairman, HM Customs and Excise on 11 December 2002. We also received written evidence from the STEPS contractor, Mapeley, which we publish with this report.

2. In March 1999 HM Customs and Excise, the Inland Revenue and the Valuation Office Agency, an agency of the Inland Revenue, (collectively "the Departments") announced the start of a joint procurement to establish a long-term partnership with the private sector for the provision of serviced accommodation to meet their needs for a period of 20 years. Following a competition, in August 2000, the Departments announced that the Mapeley consortium had been selected as the preferred bidder.[1]

3. The Strategic Transfer of the Estate to the Private Sector (STEPS) contract, signed in March 2001, was structured so that in return for the transfer of ownership and responsibility for some 600 properties to the Mapeley Group, the Departments received an up front cash payment of £220 million, together with a further £150 million in the form of discounted service prices. Under the contract, the Departments pay Mapeley a "Facilities Payment" in return for the provision of fully serviced accommodation.[2]

The contract award

4. The Departments told us that standard EC procurement arrangements were used to identify the supplier of the STEPS project. An advertisement was placed in the Official Journal of the European Commission in March 1999 inviting expressions of interest for the supply of serviced accommodation to the Departments. Following the short-listing of three contractors, tenders were received in April 2000 from Mapeley and two other bidders: Trillium and Servus. The Mapeley tender identified the owners of Mapeley as Fortress Registered Investment Trust (incorporated in Delaware USA), Soros Real Estate Investors CV (a Limited partnership formed in the Netherlands), and Delancy Estates Ltd (a company which was resident in the UK at the time the contract was signed) whose shares were subsequently acquired by Tribeca Properties Mapeley Ltd (a company registered outside the UK). Bids were received from the other consortia, each of which included at least one non-resident wanting to invest in the UK. The Mapeley consortium was chosen as the preferred bidder in August 2000 and contracts were exchanged in March 2001.[3]

5. The Departments told us that an appraisal of the proposed contract demonstrated that over its lifetime there would be a significant benefit to the Departments. The benefit was not only lower costs. Risk has been transferred to Mapeley in areas such as the flexibility in the vacation of properties, and increases in the cost of maintenance and the provision of other services. The contract also contains a formula that allows the Departments to share in development gains achieved by Mapeley.[4] Sir Nicholas Montagu told us that he was "absolutely confident that we have got a really good deal for Government."[5]

6. In this short inquiry we have examined the way the STEPS project was handled administratively by the Departments. We have not sought to examine the STEPS contract in detail and we have not come to any conclusions as to its merits for the Departments. The National Audit Office has indicated in its forward programme document that it proposes to examine the STEPS PFI project and we look to its report to determine whether value for money was obtained for the taxpayer.

Mapeley's offshore structure

7. We asked the Departments for details of the identity and place of registration of the principal companies involved in the STEPS contract. The Departments told us that: the company which tendered was Mapeley Limited, registered in the UK; the main contracting party is Mapeley STEPS Contractor Limited, also registered in the UK; and that the majority of the assets are held by Mapeley STEPS Limited, registered in Bermuda.[6]

8. Mapeley told us that in PFI contracting the private sector contractor is "typically a special purpose, bankruptcy remote, corporate vehicle. In the case of STEPS, that vehicle is Mapeley STEPS Contractor Limited,"[7] a UK company. Mapeley advised the Departments' project team that the valuable freehold and long leasehold properties would be transferred to its investment company, Mapeley STEPS Limited, a Bermuda registered company. Non-valuable leasehold properties and properties that were to be disposed of in the short term were transferred to Mapeley STEPS Contractor Limited. Both Mapeley STEPS Contractor Limited and Mapeley STEPS Limited have appointed Mapeley Limited, a UK company, to manage the STEPS Contract and the STEPS estate. Mapeley Limited is a management company with approximately 150 employees.[8] Mapeley STEPS Contractor Limited and Mapeley STEPS Limited are both subsidiaries of Mapeley STEPS Holdings Limited, also registered in Bermuda. The relationship between these companies, Mapely Limited and their shareholders is illustrated in a structure chart provided by Mapeley (shown at Figure 1 below).[9]

Figure 1: The Structure of the Mapeley Group


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.[10] 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."[11]

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 services),

— Public Services Contracts Regulations 1993 (SI 1993 No.3228), which implemented an EC Directive on public procurement,

— 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."[12]

11. Government policy is to reduce tax avoidance.[13] 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 procurement"[14] 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."[15] He also told us that he did not think it was correct to describe it as tax avoidance in this case,[16] noting that "if you are an overseas company you have no liability for UK Capital Gains Tax. Therefore these are companies without a liability."[17]

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.[18] 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."[19]

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."[20]

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.[21] 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"[22] 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."[23]

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.[24] 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."[25]

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 contract."[26] Mr Broadbent told us that the Customs and Excise Management Committee were not informed of Mapeley's offshore structure before the contract was signed.[27] Similarly, at the time the contract was signed, the Paymaster General had not been told that Mapeley STEPS Limited was registered in Bermuda.[28]

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."[29]

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."[30] 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."[31] 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."[32] 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."[33]

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 the group."[34] Sir Nicholas Montagu characterised these events as pure mistakes "for which we have apologised and set the record straight ..."[35]

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

2   Ev 5, paras 4.1, 4.4, and Ev 26, para 3 Back

3   Ev 2, para 2, and Ev 4, para 3.6 Back

4   Ev 5, paras 4.2, 4.3 Back

5   Q 4 Back

6   Ev 2, para 7 Back

7   Ev 27, para 16 Back

8   Ev 26, paras 1, 19, 21 Back

9   Ev 28, para 23 and Ev 30, Annex 2 Back

10   Ev 27, paras 16, 18 Back

11   Ev 28, paras 24, 25 Back

12   Ev 4, paras 3.3, 3.4 Back

13   Q 51 Back

14   Q 17 Back

15   Q 20 Back

16   Q 43 Back

17   Q 44 Back

18   Qq 5--64 Back

19   "Statement re Treasury Sub-committee Hearing", Mapeley, 13 December 2002, Back

20   Q 38 Back

21   Ev 5, para 5.3 Back

22   Q 46 Back

23   Q 51 Back

24   Ev 5, para 5.1, 5.2  Back

25   Ev 5, para 5.3 Back

26   Ev 5, para 5.4 Back

27   Q 24 Back

28   Ev 5, para 5.4  Back

29   Q 28 Back

30   Q 29 Back

31   Q 30 Back

32   Q 32 Back

33   Q 31 Back

34   Ev 5, paras 5.4, 5.5  Back

35   Qq 52-55 Back

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Prepared 12 February 2003