Examination of Witnesses (Questions 1-19)
INLAND REVENUE/HM
CUSTOMS & EXCISE
AND MAPELEY
WEDNESDAY 27 OCTOBER 2004
Q1 Chairman: Good afternoon. Welcome
to the Committee of Public Accounts where today we are looking
at PFI: the STEPS deal, and we are joined by witnesses from the
Inland Revenue, HM Customs and Excise and a witness from Mapeley.
Mr Varney is the executive chairman of the Inland Revenue/Customs
and Excise. It is your first visit, I believe. You are very welcome.
He is joined by Ms Helen Ghosh, director general, corporate services,
and Ms Siobhán McHale, director of estates and, from Mapeley,
Mr Jamie Hopkins who is the chief executive officer. Mr Varney,
does it give the Inland Revenue any sense of shame that they are
now known as a well known tax avoider?
Mr Varney: I do not think they
are known as a well known tax avoider. I do recognise that in
the agreement there is an unfortunate feature. As you know, the
government changed the guidelines so for a forward procurement
that would not arise.
Q2 Chairman: Why did you not specify
in the bidding documents for this deal that these properties should
be held onshore?
Mr Varney: With the benefit of
hindsight, one can say it was a mistake.
Q3 Chairman: Will you please look at
paragraph 2.24 which you will find on page 21? You will see there
that it says: "The Board of the Inland Revenue only became
aware of the tax arrangements late in the procurement" and
the Customs and Excise were not told until after the deal had
been signed. Why is that?
Ms Ghosh: I was not there. It
was before my time, but—.
Q4 Chairman: We are not interested in
whether you were there or not. You represent this Department and
you will answer questions on it.
Ms Ghosh: As you know, Sir Nicholas
Montagu and Richard Broadbent explained in some detail the background
of these events to the Treasury Select Committee in 2002 and—
Q5 Chairman: We are not interested in
what was told to the Treasury Select Committee. We are interested
in the evidence you are giving here today.
Ms Ghosh: As you will be aware,
what happened was that this point about properties being held
offshore was known to members of the project review team and,
at the time, they took the view that this was a perfectly normal
arrangement where shareholders were offshore and they did not
regard it as in any way contentious. When the decision making
was rising up to board level, my colleague Dave Hartnett, who
was then the director of technical and policy, asked a question
about the offshore nature of the shareholders and indeed the proposal
to hold the properties offshore. Again, as the TSC discussed,
the board at that time took the view that the arrangement was
perfectly legal, particularly given that the shareholders were
offshore. It established that they did not under EU procurement
rules have the right to question that particular aspect of the
tax arrangements and they therefore took the view that they had
no choice but to go ahead and sign the contract which, as the
NAO Report said, represented—
Q6 Chairman: Stop there. I am not going
to ask questions on that for the time being. Staying on paragraph
2.24, page 21, please, Mr Varney, it says, "The Government
has responded to the tax issues raised in this deal by suggesting
a new clause for future PFI contracts that limits the ability
of contractors to go offshore." Has this happened? Is it
working?
Mr Varney: As the NAO Report says,
it remains to be seen. It was included in the Aspire contract
which is a computer service contract which we let. There are provisions
in that which would stop it going offshore, but that is the only
one I know of.
Ms Ghosh: That was a voluntary
agreement we reached with Aspire because the change to the Treasury
guidelines did not come in until after we were well down the track
with Aspire. Our Aspire/Cap Gemini colleagues were perfectly happy
to enter into that deal.
Q7 Chairman: May I ask the Treasury Officer
of Accounts what is the view of the Treasury about these properties
being held offshore?
Mr Glicksman: As the witnesses
have said, this was a legal arrangement.
Q8 Chairman: Was it desirable?
Mr Glicksman: As they have also
pointed out, the Treasury issued guidance to departments following
these events to ensure that departments were aware of this possibility
in the future and took steps to try and make sure that undesirable
tax arrangements did not come about in future procurement contracts.
Q9 Chairman: Mr Hopkins, should you not
be more honest with the departments about your intentions to hold
some of these properties offshore?
Mr Hopkins: We are a company that
is owned and was set up by non-UK resident shareholders, so we
followed all of the current guidelines and reacted—
Q10 Chairman: That is not the question
I asked you. Should you have been clearer with the departments
about your intention which I put it to you you always had to hold
these properties offshore?
Mr Hopkins: It is a very common
structure that we followed and the departments set the process—
Q11 Chairman: Did you inform them about
your intention to hold these properties offshore?
Mr Hopkins: We did.
Q12 Chairman: At what stage?
Mr Hopkins: November 2000.
Q13 Chairman: How close to the beginning
of the process was this?
Mr Hopkins: It was in between
preferred bidder and close of contract.
Q14 Chairman: Was it always your intention
from the beginning of this process to hold these properties offshore?
Mr Hopkins: Yes, it was.
Q15 Chairman: As far as you were concerned,
at the beginning of the process you simply were not asked by the
departments so it is down to them, is it?
Mr Hopkins: We followed all the
guidelines of the bidding process and—
Q16 Chairman: Given that your shareholders
were based offshore, the departments should have realised from
the beginning that it was natural for you to hold these properties
offshore. Is that a fair question, Mr Varney? You were just grotesquely
naive, were you not?
Mr Varney: I think it is easy
to be very clear after the event.
Q17 Chairman: What do you mean it is
clear after the event? You do a deal with a company whose shareholders
are largely based offshore. This results in massive, bad publicity
for the Revenue and then you tell us that we should be wise after
the event.
Mr Varney: You asked me whether
it was possible to foresee that. I always think that, with the
benefit of hindsight, it is clear that it should have been foreseen.
Q18 Chairman: Why do we need the benefit
of hindsight to foresee it? Was it not clear at the time? Do you
not have some of the brightest brains in this business?
Mr Varney: I think even with the
brightest brains it is my experience often that you find events
afterwards trip you up. This is one of them.
Q19 Chairman: They did what to trip you
up?
Mr Varney: I think what happened
was the concentration was on getting the estate into a shape where
a PFI deal could be undertaken with all the lessons learned from
the DWP experience. One of the lessons that was not learned was
obviously the possibility of a tax shelter.
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