Examination of Witnesses (Questions 1-139)
HM REVENUE &
CUSTOMS AND
MAPELEY ESTATES
LIMITED
20 JANUARY 2010
Q1 Chairman: Good afternoon, welcome
to the Committee of Public Accounts where today we are considering
the Comptroller and Auditor General's Report on HM Revenue
& Customs' estate private finance deal eight years on.
We welcome Lesley Strathie, Chief Executive of HM Revenue and
Customs and Nick Friedlos, the Chief Executive of Mapeley. Ms
Strathie, would you like to introduce your colleagues please?
Ms Strathie: On my left I have
Dave Hartnett, Permanent Secretary for Tax and Simon Bowles, Chief
Finance Officer to Revenue and Customs.
Q2 Chairman: Perhaps we could start
by looking at the recommendations from the Comptroller and Auditor
General. You will see that he says you have not achieved value
for money so far because you have not obtained all the benefits
of the deal and you do not have a strategy for using the property
vacation provisions. Why do you disagree with the Comptroller
and Auditor General in his conclusions?
Ms Strathie: First, I do not disagree
with the fact that maximum value from this contract has not been
taken and that the Department could have been more strategic in
its approach. The part where we disagree is what I perceive as
the NAO's narrow definition of value for money when I actually
think this contract has enabled much broader value for money for
HMRC. It enabled savings to be taken, it enabled vacations which
have not been taken but within the totality of the change which
the Department has absorbed and what it has done, that is where
we disagree. We can agree on that.
Q3 Chairman: We can agree on this:
you did not obtain all the benefits; you did not have a firmed
up plan for property vacation. We can agree on that. Do you want
to comment on that Comptroller and Auditor General?
Mr Morse: Ms Strathie and I are
in broad agreement as to the fact that the benefits were not obtained
and there was not a firmed up plan. I am quite content if we want
to disagree on precisely how we are defining value for money.
Q4 Chairman: We can move on. We have
cleared that disagreement up, or at least found out the nature
of it. Can you look now at paragraph 2.21? We read there that
the total savings now available have reduced from £1.1-£1.2
billion to about £900 million. Obviously you have got
considerably less out of this, one third of a billion less than
you wanted to out of this deal. How are you going to maximise
savings over the next 12 years? What is your strategy now?
Ms Strathie: May I ask Mr Bowles,
who has taken the lead on this contract, to answer that question?
Mr Bowles: I would like to look
to your question on how we will maximise value from this contract
over the remaining period, particularly having joined the Department
last March. While I cannot change the past, I can certainly focus
on the future. There are three strands here. The first one is
around strengthening and improving the processes within the estates
function in HMRC because that is a key element of getting value
out of this contract and that includes the links to the business
change. This contract has an important role in enabling the business
to shape itself, to deploy people as efficiently as possible and
that gives us options which we would want to optimise. The first
piece is around the improvement of the ESS, the estates function.
The second piece is around a number of commercial areas which
we are working on in collaboration with Mapeley. Some of them
are day-to-day issues which have arisen over the last four or
five years, where we will be clarifying savings available under
the contract and taking advantage of them. That needs to develop
into the third strand which is developing a partnership. I absolutely
accept the recommendations and points made by the National Audit
Office that we can improve the elements of partnership between
Mapeley and ourselves. That will require work not only on our
side but also on Mapeley's.
Q5 Chairman: Let us look at how we
can improve this partnership, in particular paragraph 3.10. You
do not know what profits Mapeley have made. If you do not know
what profits they are making, how can you know whether they are
charging you a fair margin or not?
Ms Strathie: If we just step back
and accept the time this contract was negotiated and signed and
the terms that were signed and from 2001 fast forward to 2007,
we are working with Mapeley to try to agree transparency, open
book and best practice as defined in 2007. That is probably a
question for Mapeley as to where we are on that particular journey.
We now have greater sight and we have proposals from Mapeley on
greater insight into that but it is beyond what we are required
to do in the contract. If we are to work in the spirit of alliance
and partnership going forward, I believe that is what we need.
Q6 Chairman: Let us now turn to Mapeley.
Mr Friedlos can you assure this Committee that you are going
to share with the Revenue this information that they need, that
you are going to give them full information on what profits you
are making so that we know, on behalf of the taxpayer, whether
we are getting a fair margin or not? Can you assure the Committee
that you can give them that information and that you will cooperate
fully with them?
Mr Friedlos: I can assure the
Committee of that. We have asked the Government to consider one
or two safeguards around freedom of information and protecting
the data.
Q7 Chairman: That is in recommendation
"a". If you are going to do that in the future, why
have you not done it in the past?
Mr Friedlos: We have always responded
to requests that we have received.
Q8 Chairman: That is now a given.
Are you happy with that Ms Strathie?
Ms Strathie: Very happy.
Q9 Chairman: We are here to help
you.
Ms Strathie: Thank you.
Q10 Chairman: Mr Friedlos, paragraph
2.19. You raised concerns with HMRC in January 2009 about financial
pressures arising from the vacations programme. Obviously the
Revenue want to vacate properties from time to time. You said
this was putting great pressures on you. Were you not just looking
for concessions?
Mr Friedlos: We were not looking
for concessions.
Q11 Chairman: If you were not looking
for concessions, what were you looking for?
Mr Friedlos: What was important
to us at that time, when we gained visibility of the scale of
their plans over the next few years, was really rapidly to get
as much clarity as we could around exactly what those plans were
in terms of timings and building and so on and also to get resolution
of one or two outstanding commercial items between us.
Q12 Chairman: What would happen if
HMRC vacated every building? Would you survive?
Mr Friedlos: It cannot vacate
every building at once. What we are looking at is a plan over
the next two to three years where it largely catches up on the
vacations it has not used to date and we do survive.
Q13 Chairman: The truth is Mr Friedlos
that you underbid for this contract, did you not? Your bid was
way below other people and now you cannot afford the contract.
Now that the Revenue are putting pressure on you, you are screaming
foul, are you not?
Mr Friedlos: We are not screaming
foul. We can afford the contract. We bid the contract at a keen
margin which we knew at the time and was commented on at the last
NAO Report. We can afford the contract.
Q14 Chairman: Ms Strathie, paragraph
10. I know that you personally were not involved but unfortunately
you have to take the rap for this. Do you accept that your Department
did not have the right commercial skills at the time when you
were making this contract?
Ms Strathie: If I look back on
my own experience of that time in another government department
and I look at the prime contract the DWP have and their experience
and I look back on HMRC's experience, I think that is fair criticism
of the Department.
Q15 Chairman: What do the Treasury
say to this? Do you think you can now ensure that departments
have the right commercial skills for this type of contract in
the future? Have you learned from this?
Mr Gallaher: Yes, we have and
we have learned from other National Audit Office Reports which
came in front of this Committee in recent months. We will be working
with the Office of Government Commerce to tighten up the criteria
for recruitment of expertise in delivering complex projects and,
if I may, I will drop you a note on this.[1]
Q16 Chairman: We have had other instances;
Metronet for instance and highways maintenance.
Mr Gallaher: Yes.
Q17 Chairman: This was a massive
own-goal, was it not? You did a deal with an offshore company.
Here you are. You are supposed to be raising taxes on behalf of
us. Why has this happened? How could you have got yourself in
this mess that way down the negotiations you found that you were
dealing with an offshore company? Is this how the Revenue should
conduct themselves, you of all people?
Ms Strathie: Certainly for the
first two or three years of the contract that was the focus and
much handling of the media and that is a very difficult time in
the early days of a contract like this. I know much has been made
of it.
Q18 Chairman: Do you agree that it
is quite right that much should be made? It was a disgraceful
situation that you got locked into a contract and you did not
have the right commercial skills. When it was too late you found
you were in bed with an offshore company, you of all people.
Ms Strathie: I do not know how
disgraceful it was in 2001. What I do know today is that 82% of
companies in this business hold leases offshore. I do know that
you then have to question what that means and you have to balance
overall. At the end of the day I am responsible for collecting
the revenues and I am also responsible for an admin budget and
you need to look at the trade-off of what it would cost if those
leases were onshore, what that would mean for my partner's competitiveness.
Q19 Chairman: Mr Friedlos, will you
now give an assurance to this Committee that you will bring ownership
of these properties onshore?
Mr Friedlos: That is not an assurance
I can give today.
Q20 Chairman: So you will not give
that assurance.
Mr Friedlos: We have not been
asked to do that. It is certainly something we will consider,
if asked.
Q21 Chairman: This whole issue has
delayed including additional properties in the contract, has it
not? This is causing a difficulty with the HMRC, is it not?
Mr Friedlos: It would appear that
the delay in bringing one group of 11 properties into the contract
is because of an "offshoring" issue.
Q22 Chairman: It is not just a political,
with a small "p", own-goal it is actually impacting
on the contract, is it not? You should never have done a deal
like this with an offshore company because you are now filled
with embarrassment as you are trying to manage this contract.
That is the truth is it not? It is better just to admit it now.
You were not responsible at the time. We do not hold you personally
responsible, but we just want you to tell the truth.
Ms Strathie: I am not embarrassed.
Q23 Chairman: You have a very high
embarrassment threshold.
Ms Strathie: You have to have
in my job. I do feel that much is made of this, what the tax implications
would be at the end of this contract and would be today, with
issues which I am sure Dave Hartnett is much better equipped to
talk on. The issue of bringing other properties in is one that
we need to take a strategic view on based on the offices that
we are serving vacation notices on, those that we have announced
will happen over the next two to three years and what that means
then for the proportion of buildings which are in this contract
and the proportion of buildings which are outside it and what
I believe is the best thing for HMRC and the UK taxpayer going
forward.
The Committee suspended from 3.45pm to 3.49pm
for a division in the House.
Q24 Angela Browning: Can you tell
me why your company invoices HMRC for accounts dating back to
2001? Why were you unable to invoice in a timely manner?
Mr Friedlos: We do invoice the
bulk of our charges on a very timely basis. We invoice around
about £206 million a year on a monthly basis. There
are occasionally items which arise outside the normal course of
the contract where some specific agreement or discussion is appropriate
before we bill. Those are the items which sometimes accumulate
unbilled for a period of time.
Q25 Angela Browning: The period of
time amounting to nine years according to this Report: £12
million dating back to 2001.
Mr Friedlos: Yes; that relates
to additional services which we were asked to provide. At the
time we were asked to do so, the methodology for pricing those
services was not clearly agreed between the Department and ourselves.
Once that agreement was reached, we then began a process of catching
up on the invoicing for those amounts.
Q26 Angela Browning: I appreciate
that if there is a dispute there will be some period of time for
negotiations, but this does seem to be somewhat excessive. How
timely were these invoices relating to this £12 million?
Mr Friedlos: The invoices relating
to the £12 million were in relation to a number of individual
items which accumulated over a period of years. The Department
were aware that these were accumulating and once the methodology
was agreed and we had done the work to substantiate and demonstrate
to the Department the validity of those charges they were duly
invoiced.
Q27 Angela Browning: Why is it then,
if these disputed amounts were accumulating and the Department
were aware of it, that it has taken so long to come to some agreement
to get them paid?
Mr Bowles: I mentioned earlier
that we had a number of areas where we needed to resolve long-standing
commercial negotiations and I was very keen that as part of this
partnership development with Mapeley we did not deal with things
piecemeal. We are currently engaged with Mapeley in going through
all of these to get the best result for the taxpayer. I am confident
that we will get resolution relatively soon.
Q28 Angela Browning: Does part of
this contract involve any element of surcharges or interest being
accrued on late payment?
Mr Bowles: Not to my knowledge.
Q29 Angela Browning: So we have not
paid in addition to the disputes.
Mr Bowles: No.
Q30 Angela Browning: Are you content
that you have now communicated sufficiently for these not to happen
again?
Mr Bowles: The answer lies in
improving our processes both within the Department and with our
supplier to make sure we have early visibility to these and that
is what I referred to earlier in terms of overall improving the
processes and capability.
Q31 Angela Browning: Thank you. Ms
Strathie, may I bring you back to something which was mentioned
right at the beginning? If you look at page 8 and the summary,
under "e" the heading is "Understanding value for
money". I was a little bit disconcerted at your comment about
the interpretation of the NAO Report in terms of what value for
money really means. Just to set my mind at rest let us look at
that "The Department does not monitor the overall cost of
the contract against initial models to understand whether it is
achieving value for money". Is your understanding of value
for money that that is something you should be doing?
Ms Strathie: Yes; absolutely.
I separate the two issues of what the contract was that was put
in place and enabled versus the things that the Department has
seen through since that time. It is absolutely the job for the
strategic partners in managing this to look at the value from
the contract as business strategy changes and ensuring our estate
strategy follows it and that we get full value.
Q32 Angela Browning: It goes on to
say the Department "has not undertaken analysis on the potential
savings available". Is that something which has now been
put in place?
Ms Strathie: Yes, but, bearing
in mind that we are talking about what happened from 2001 to 2009
and how we want to proceed from now on, we have a contract which
enables us to move out of properties under different terms, depending
whether they are core or otherwise. Rather than just take what
the contract offers us at the moment, given how fast the world
is changing, it is really important for us to look at this across
both our businesses and ask how the taxpayer could get better
value in the future.
Q33 Angela Browning: That would bring
in the next bit which says "analysis on the potential savings
available" and then, going on, it says "Until recently
it had a limited understanding of its liabilities in the event
of contractor default". I assume you have addressed that
now.
Ms Strathie: Yes.
Q34 Angela Browning: How have you
addressed that?
Ms Strathie: We have a really
extensive business continuity plan. We do have an understanding
of our liabilities but I would say—
Q35 Angela Browning: Sorry; not your
liabilities the liability of the contractor.
Ms Strathie: It would default
to us.
Q36 Angela Browning: Yes, but there
is an underlying issue here, is there not, in that you are obviously
very aware of your own liability? However, what this is identifying
is an understanding of the liability in the event of a contractor
defaulting. In other words what their position was.
Ms Strathie: That falls on us.
Q37 Angela Browning: Yes; of course.
Ms Strathie: Primarily, if a company
becomes insolvent, if any of my suppliers becomes insolvent, I
have to have a plan for carrying up the risks associated with
that. Clearly we have no preferred creditor status in any of this
but we have done extensive work to understand what that would
mean for HMRC were that to happen. Of course, not only would we
lose the flexibility we have in this contract around reshaping
the business, we could potentially have outstanding bills, depending
what state the company was in at the point it became insolvent.
Q38 Angela Browning: In terms of
a large long-term contract like this, what interim steps do you
take from the time you sign a contract to ensure the viability
of the contractor? Presumably when you first sign a contract you
do the usual checks and so on in terms of their viability.
Ms Strathie: Yes.
Q39 Angela Browning: What interim
steps do you take? It seems to indicate here that it was only
recently that the Department had an understanding of the liabilities,
of what might happen if the contractor defaulted. What interim
measures do you take to make sure that all is as it was originally
said in the contract?
Ms Strathie: I would not like
to give the impression that it is only now that that work is going
on because my own piecing together of what has happened over the
time suggests otherwise, that it is an ongoing part of the Department's
business to assess that.
Mr Hartnett: The right thing to
say is that we started to look at the viability of Mapeley very
early because it was some nine months after the contract was signed
that Mapeley raised with us the issue of financial difficulties.
We brought in bankers and accountants at the time to have a very
good look at their viability and over a period of about two years
then put in place checks both through conversations with Mapeley
and through looking at the markets through professionals. It is
fair to say that the intensity of the work then did not continue.
We thought we had reached a position which was reasonable and
then it started again in the last couple of years when there have
been market difficulties and the like. So there have been two
periods of really intense work.
Q40 Angela Browning: May I take from
that that your understanding of value for money, from the replies
you have just given, are actually no different from that of the
Comptroller and Auditor General?
Ms Strathie: The point made in
the Report was that the contract was set up to enable an amount
of money. The Department did not appear to have had a strategic
approach as to how it was going to extract maximum value throughout
it. I can only say "appear" because I was not there.
My issue was that the Department has achieved significant savings
and significant value for money in the way it has shaped its business
and this contract has enabled us to do that as the Department
has modernised. That is the only difference.
Mr Morse: I do not think anything
you say is wildly apart. Just to be clear about the test we apply,
it is not a counsel of perfection; it would be unreasonable to
expect that everything which could conceivably be achieved must
be achieved. That is not the position the NAO take. What we do
say is that what, by normal diligent effort, could and should
have been achieved, if that has not been achieved, then I am not
prepared to say that something is value for money. If you should
have sold something for £3 and you sold it for £2, just
because £2 is more than it cost you does not make it value
for money unfortunately. There is an expectation of due care and
attention and effort to preserve public value and if you are not
at that point, I do not think we can testify that it is value
for money. It is our view that if you had had those plans in place
and you had been more engaged and more constantly concerned about
viability and so forth than you actually were, we would not have
been criticising on value for money. It is not a question of saying
you should have achieved every pound but we feel the diligence,
the effort and the competence applied to it was not really enough
for us to come to a positive opinion about what could reasonably
have been expected in the circumstances.
Q41 Chairman: I am afraid we cannot
accept in this Committee, just because a department makes some
money, that it has achieved value for money. We have to look at
objective criteria. It seems to me that what the Comptroller and
Auditor General is talking about makes sense.
Ms Strathie: I do not disagree
with anything that Mr Morse has said.
Q42 Angela Browning: At the bottom
of "e" there is a specific recommendation from the National
Audit Office and I think I would be happy if you could just confirm
that you accept that and that is what will happen in the future,
where it begins "The Department should prepare" et cetera.
Ms Strathie: I can absolutely
confirm that is what will happen in the future. I can confirm
that all of our strategic arrangements and contract management
from board level downwards are in place including the strength
in both our commercial and our legal resources in this area. Absolutely.
Q43 Mr Bacon: Could you tell us what
would embarrass you?
Ms Strathie: Not very much.
Q44 Mr Bacon: Not very much; my point
being that if being the boss of one of the world's leading tax
authorities and entering into a property deal with an offshore
tax avoider for your own property does not embarrass you, then
what would?
Ms Strathie: I said I was not
personally embarrassed and I tried to set out why. I would be
embarrassed if I felt I were not doing the job I am paid to do.
I accept all of the success that HMRC have had and all of the
areas for improvement when I take the job. The only thing I can
do is change the future, so I am not embarrassed about what I
have done in this contract since I took the job.
Q45 Mr Bacon: That is a great line
for a 1960s folk song: the only thing I can do is change the future.
Mr Friedlos, who owns Mapeley?
Mr Friedlos: About 80% of the
shares in Mapeley are owned by funds which are managed by Fortress
Investment Group, a US fund management company.
Q46 Mr Bacon: Right. And the other
20%?
Mr Friedlos: The other 20% are
owned by management, individuals and some other professional investors.
Q47 Mr Bacon: It says in the Report
that when the deal was struck Fortress Registered Investment Trust
and Soros and Delancey Estates owned the business. There is a
piece in the Sun newspaper, which as we all know is a paper
of record, which said on 17 June 2005 that Mapeley had made a
dashing stock market debut yesterday. Was there then a flotation
followed by a private buy-back, a private equity deal of some
kind, where it was taken off the stock market again? Is that what
happened?
Mr Friedlos: No, there was a flotation
in June 2005. We were a public company for just over three years.
The company de-listed, came off the stock market in April 2009
because Fortress, or the funds managed by Fortress held more than
75% of the equity and we were required at that level to de-list.
Q48 Mr Bacon: It says in your CV
that you are responsible for all areas of day-to-day business
of the company, including day-to-day operations.
Mr Friedlos: Yes.
Q49 Mr Bacon: Do you live in Bermuda?
Mr Friedlos: No, I do not live
in Bermuda.
Q50 Mr Bacon: I do not understand.
The company is based in Bermuda and, if you are responsible for
the day-to-day operations, how do you run it?
Mr Friedlos: The company's investments
are based in Bermuda and the Bermudan company is run by a board
of directors.
Q51 Mr Bacon: So there are people
over in Bermuda running it.
Mr Friedlos: There is a board
of directors in Bermuda who take decisions around the property
investments. Those are generally not day-to-day decisions. The
day-to-day decisions around the contract and how we operate it
are taken in the UK.
Q52 Mr Bacon: And you live in the
UK.
Mr Friedlos: I live in the UK.
Q53 Mr Bacon: Are you domiciled in
the UK for tax purposes?
Mr Friedlos: I am.
Q54 Mr Bacon: Excellent; good to
hear it. On this Committee we all like people who pay tax in this
country. I should like to ask about the old NAO Report which I
was looking at and which was published back in May 2004. It said
"The Departments" two at the time "and Mapeley
STEPS needed to develop a single business focus that will involve
the Departments developing an understanding of how their own decisions
impact on the contractor" perhaps slightly worrying that
the departments did not have that anyway "and the latter"
that is Mapeley "continuing to provide access to its income
and forecasts". Yet we find in the present Report which has
just been published, in paragraph 3.14 on page 26 that there still
is no shared database of information. It says in paragraph 3.14
"The two organisations do not share key information in a
consistent manner, such as having a shared database ... and a
joint understanding of the vacation allowances used" in other
words, a joint understanding of the way in which the contract
that enables you to vacate properties is working. It also says
"... the organisations do not have a good understanding of
each other's objectives and strategies. There is also no shared
risk register" either. This is despite the fact that these
things were identified and pointed out five years ago and the
need for the company, Mapeley, to provide access to its income
and forecasts and the need for you and your predecessor departments
to have a clear understanding of how your decisions impacted on
the contractor. Why has so little happened in the last five years
that the NAO is still making this criticism? It is five and a
half years.
Ms Strathie: The first thing I
would say is that it is degrees. Mapeley do have a shared view
of our business plans. As you probably know, because I wrote to
you, we have firmed up our vacations. We had a very extensive
consultation exercise which finished and the results were announced
in December 2008. We have now firmed up our intention of where
we planned to cease business activities during the financial year
2010-11. All of that Mapeley has had sight of. The issue comes
back to the original question which Mr Friedlos already answered
in terms of shared financial information. I would hate the Committee
to go away with any notion that there was nothing in that period.
My view is that from 2007 Treasury guidelines and best practice
suggest a different type of relationship. This contract was not
negotiated in 2007 but in 2001. My expectation is, if we are in
true partnership with Mapeley, that they will live up to that
best practice from 2007.
Q55 Mr Bacon: That is your expectation
but what are the actual barriers to having an effective partnership?
Are you saying it is whether Mapeley cooperates or not?
Ms Strathie: Yes, but we have
to take some responsibility in HMRC. A true partnership is an
alliance where there is win-win, there is absolutely shared information
about a business strategy going forward, shared thinking of the
shape of the business, so a lot of transparency and strategic
sharing needs to happen at board level. That is something we put
in place with both the Chief Finance Officer in the lead and Dave
Hartnett on that board and myself and Nick on a biannual basis.
I accept that the Department could have perhaps been more strategic.
Q56 Mr Bacon: The Report actually
says that the Department have not assessed the benefits realised
by Mapeley in the STEPS deal nor the profitability of the Mapeley
group. This is something I struggle with because you did say earlier
in answer to the Chairman that you disagreed with the National
Audit Office in terms of their narrow definition of value for
money but if you have not done that basic assessment—I think
Angela Browning asked this question and I am not really content
that I understood your answer—of Mapeley's profitability
and the benefits which have accrued to Mapeley, how can you possibly
undertake a thoroughgoing assessment of value for money? How are
you in a position sensibly to disagree with the National Audit
Office?
Ms Strathie: I think we are mixing
currencies and we have already had this conversation twice. One
issue here is managing the contract and managing the value of
the contract. There is another issue about Mapeley's robustness
and resilience and its viability.
Q57 Mr Bacon: On that last point,
may I stop you there? Mapeley came to you within seven months
of the contract being signed in 2001 and started bleating that
it was running into difficulties and it has done so recently because
of pressures arising from the economic downturn. This has been
a company with a history of coming to you saying it has financial
problems right from the inception of the contract, has it not?
Ms Strathie: I cannot answer that.
Can you?
Mr Hartnett: Certainly seven months
into the contract.
Q58 Mr Bacon: Not very impressive
and it was not a depression then or anything like it, was it,
in 2001 and 2002? Most people thought it was a boom.
Mr Hartnett: I do not think it
was in the context of Mapeley because property prices went on
to rise and some of the reverse premia that Mapeley took later
enabled them to come out of that particular financial difficulty.
It was not quite a boom in the property that Mapeley held at that
time.
Q59 Mr Bacon: I should just like
to go back to the first of your two points in your last answer
Ms Strathie and that was about the management of the contract.
You agreed that it was a fair criticism that not enough, in the
words of the Report, appropriate legal and commercial skills were
applied to it. I still do not understand why not. This was a £4
billion contract. Regardless of what particular Treasury guidance
there was or was not at the time, surely if you are entering into
a contract of this scale, common sense would suggest that you
apply serious commercial and legal resources to it. Why was that
not done?
Ms Strathie: It would be very
easy for me to agree with you and simply say I do not know and
my predecessor should have done better. All I can point to is
the history of this type of outsourcing at that time. I know from
different departments I worked in at that time—and I do
think it is fair criticism—that there was a tendency to
believe that the outsourcer was going to deliver everything as
per the contract and that we scaled down the capabilities, what
I would probably refer to as strategic management, strategic thinking,
when we did outsourcing, which was something many parts of Whitehall
had to learn from going forward. We accept that criticism. I do
know from driving the structure we put in place and the relationship
now how we can get better value from the contract and better sharing.
Q60 Chairman: I know there is a convention
in this Committee that permanent secretaries have to take the
rap for their predecessors and they cannot say they were not there,
but we would be much happier if you could just give us your honest
assessment of what happened then. If you think it was badly handled,
say so. It is much better so we can learn lessons for the future.
There is no point always just dropping a straight bat on something
and not getting the truth.
Ms Strathie: I do not know the
extent to which the Department managed the risk of Mapeley as
a new player in the market coming in on the bid they did and what
that meant the Department ought to have done to ensure that this
was the right contract and ready to deliver. I do not know. I
know they are some of the things I have learned. I also know on
this side of the contract there is little point in anybody adopting
a procurer/supplier/deliverer relationship. It does take a partnership
and it does take real understanding of each other's businesses
to get best value. I also know that if Mapeley can only help us
get that value, if the Department has a clear understanding about
its direction of travel over years to come and what that means
and that that is shared, those for me are the things I have learned
over the years.
Q61 Dr Pugh: The contract is extremely
odd to my way of thinking about it because it seems to me that
you are committed to a process of building rationalisation regardless
of any other corporate needs you may have. Just to test my understanding
of it, do I conclude correctly if I think that if you go too fast
in shedding buildings, there will be penalties attached, but if
you go slowly, as you apparently have done according to the NAO,
you will be castigated for making fewer savings?
Ms Strathie: I think I am well
used to being in that "damned-if-you-do-and-damned-if-you-don't"
situation because it is difficult to please everybody all of the
time. The contract enables us to take different actions in coming
out of properties according to whether they are core or otherwise.
First I would say that after this contract was signed in 2001,
you then had an expansion of business in the shape of tax credits
in 2003. Whilst you had enabled a contract here which allows you
to vacate the estate, you had lots of other changes which have
happened. I am not driving the rationalisation of our estate simply
from getting value from this contract. I need to reshape the business
to match the risks that we face in tax collection.
Q62 Dr Pugh: If you had a business
requirement which involved fewer savings on this contract you
would be comfortable with that.
Ms Strathie: If I had a business
requirement—
Q63 Dr Pugh: You needed more accommodation
than you thought.
Ms Strathie: It would not change
my decisions or the consultation exercise and the result about
vacating the premises and ceasing business.
Q64 Dr Pugh: If you vacate at too
rapid a rate, presumably Mapeley then invokes some penalty clauses
to some effect, do they not?
Mr Bowles: Yes, there are costs
involved if we go faster in using the vacation allowances.
Q65 Dr Pugh: You cannot go too fast
and you cannot go too slowly without getting the wrath of the
NAO. Following through on that, the Chief Secretary to the Treasury
wrote to lots of Members of the House of Commons last week saying
that 130 tax offices were scheduled to be closed in the financial
year 2010-11. That is correct, is it not?
Ms Strathie: Yes.
Q66 Dr Pugh: In terms of those parameters,
too fast or too slow, which side are you on?
Ms Strathie: The first thing to
say is that we are exercising the contract; we are not exceeding
that. It is important here to say that what I have written and
announced is that we will cease business and the first people
we had to tell that to were the individuals who are located in
those offices who are employed by HMRC. The vacation notice and
actual vacation is quite separate from ceasing business to allow
the next stage.
Q67 Dr Pugh: Of those 130 properties,
how many are leasehold, how many are freehold? It would be helpful
if you could send us a note.[2]
Mr Friedlos, what is going to be the effect on Mapeley and their
finances if 130 tax offices become surplus to requirements? You
could propose in one case you get a huge penalty sum from HMRC.
In the other case you might be landed with a lot of property you
cannot sell. What has been the effect?
Mr Friedlos: The effect when a
property becomes vacant is broadly that if it is a freehold property
and it is vacant, we can sell it. If it is a leasehold property
and it is vacant, our job is to re-let it.
Q68 Dr Pugh: Do you welcome the prospect
of having a large tranche of freehold property, some of
it quite unattractive, to have to sell in current market circumstances?
Is it good for Mapeley?
Mr Friedlos: It is our business
to deal with it; it is the contract we signed up to.
Q69 Dr Pugh: If 130 tax offices close
on time will you receive any financial help from HMRC because
of the contract?
Mr Friedlos: Those vacations will
all be dealt with under the contract. We will not receive any
money.
Q70 Dr Pugh: Will you get any money
because of the 130 suddenly being put on the table that were not
there before?
Mr Friedlos: It will be dealt
with in accordance with the contract.
Q71 Dr Pugh: Will you get any money?
Mr Friedlos: Some of those vacations
in the contract can happen without any additional payments to
us and some of the vacations require some additional payments.
Q72 Dr Pugh: Can you tell us how
much money you will get?
Mr Friedlos: I cannot tell you
exactly how much money we will get; it will depend on the timing
and the exact pattern of those vacations.
Q73 Dr Pugh: Let us assume the hypothesis
is that they all go, as the Permanent Secretary has said, in 2010
and 2011. Could you send us a note saying how much payment you
will get as a result of that?
Mr Friedlos: We will clarify that.
Q74 Dr Pugh: There are going to be
additional costs in moving out of these 130 places and I would
like to turn to Mr Hartnett. You presumably calculated the cost
of accommodating those staff who will be moved out of them?
Mr Hartnett: That is really one
for Mr Bowles.
Mr Bowles: That depends ultimately
on how many of the staff affected leave the organisation and how
many are redeployed.
Q75 Dr Pugh: You must know what your
need of staff is and presumably you do not have the buildings
for staff from 130 offices at the moment, do you?
Mr Bowles: No.
Q76 Dr Pugh: So are you going to
have to purchase some more buildings?
Ms Strathie: No, we have 2,400[3]
people in those buildings; 1,900[4]
will transfer to other locations which have already been agreed.
People there concerned had already volunteered for that and did.
The remainder, 1,450[5]
have been given a range of options around severance; we are not
going to acquire new buildings, they will move to one of the strategic
locations.
Q77 Dr Pugh: I understand all that.
What I am trying to get at is that you must be working with some
working assumptions about what would be the cost of re-accommodating
staff from 130 offices elsewhere and that has to be factored into
the exercise; I assume it will.
Ms Strathie: Yes, that is the
case.
Q78 Dr Pugh: If you can give us any
information on that it would be very helpful.[6]
According to a letter I have received from Mr Hartnett, enquiry
centres, in all these offices presumably, will be retained in
their current locations or nearby. I assume not their current
locations because that would make the property more difficult
to sell. Do you have a figure in your budget which illustrates
the amount you will need to keep all these enquiry offices open?
Ms Strathie: We always intended
to retain face to face because that was part of the consultation.
Q79 Dr Pugh: Do you still intend?
Ms Strathie: We do still intend.
As you will know from the letter I sent, on 59 of those we are
open to consultation as to whether they are full time.
Q80 Dr Pugh: What I am getting at
is that you are going to have to find new premises to keep these
enquiry offices open in the place they are supposed to be open
and Mr Hartnett said they will be open. That has a cost; that
has a figure. I assume in your planning you know something and
you can give us this.[7]
Ms Strathie: Let me start with
service. Just to be clear, we are not closing any face-to-face
locations we have; these are back office people. We are talking
here about ceasing business where we had business because it has
already moved some time ago and people have been involved in other
work. In many cases this is a floor of a building, so if it came
to it at the margins that the only way we could vacate was because
there was a much better deal to put that small business face to
face elsewhere, we would work with the partners to do that.
Q81 Dr Pugh: What I am trying to
do is price the additional costs of this workforce renewal/change/rationalisation
of accommodation. When I enquired about Duke's House, which is
in my own constituency as to what would be the effect of closing
down the office, I got from your office a statement which said
that on current figures the payback, accommodation versus other
costs, accommodation rationalisation, would take approximately
19 years. Are you able, for all these 130 offices, to have some
idea of what the payback would be for all of them? Can you send
us a note?[8]
Mr Hartnett: We can do that but
I have to say I have no recollection at all of saying that, so
it would be very helpful if I could have a look.
Q82 Dr Pugh: It is a document from
your implementation team and it is the business case for the rationalisation.
It does suggest the rather high figure of 19 years before there
is any saving out of this closure.
Mr Hartnett: Let me say how much
that surprises me in this sense: I know the building well, I have
been in it many times in my career but we have other very substantial
buildings not very far away. To think that it might take 19 years
to realise the savings surprises me. I put it no stronger and
we will send you a note.[9]
Q83 Dr Pugh: My general concern is
that it may look like you are making some sort of saving but if
you do not have all these costs built into the equation, you may,
in the short term at any rate, be tasking yourself—
Mr Hartnett: One thing, if I may,
about the enquiry centres. In our calculation of savings we have
not taken the saving in relation to enquiry centres because we
know we have to keep enquiry centres. In some places there might
be a marginal increase in the cost for the enquiry centre, but
I do not think there are any substantial ones. We will check that.
Q84 Geraldine Smith: Just so I am
clear, how much more has the contract cost than you originally
estimated? Is it £507 million?
Mr Bowles: Yes. The NAO Report
very helpfully actually puts a number of numbers together here.
It is probably just worth mentioning the bid from Mapeley which
came to £3.3 billion in 2009 currency and then a recent estimate
of contract life of £3.87 billion. The difference between
those is £570 million.
Q85 Geraldine Smith: The contract
put forward by Mapeley was supposed to be £300 million cheaper
than managing it within the public sector, basically you doing
your own nationalisation of buildings. Rather than have this complicated
contract with a private offshore company which is not even paying
tax on the properties, would it not have been much more sensible
just to manage it within the public sector yourselves?
Ms Strathie: Again we go back
in time.
Q86 Geraldine Smith: Yes, or no.
Would it have been cheaper? On the figures I am looking at it
would have been.
Ms Strathie: No, because even
the NAO have concluded that this is a good contract.
Q87 Geraldine Smith: I am still not
with you. It says in this Report that the contract you originally
negotiated would have been £300 million cheaper than managing
it within the public sector. However, it is now working out at
£570 million more.
Mr Bowles: Many of the factors
which affect that were changes in the specification of the building,
details of the building, which would have affected the public
sector equivalent against which it was compared.
Q88 Geraldine Smith: Do you not lose
a lot of your flexibility when you are in this long-term contract,
if you are managing it yourselves? You said before that there
were tax credits, there were different policy changes which affected
your buildings and affected where people are working. You do not
have the flexibility because you are dealing with a private company.
Mr Bowles: If I may, I think it
is actually the converse because the attraction of this contract
was that it gave a great deal of flexibility as the Department
has the right to vacate 60% of the STEPS estate, 42% of which
is at no additional cost and 18% which attracted compensation.
Q89 Chairman: The Comptroller and
Auditor General is nodding. He might be able to row in to your
help.
Mr Morse: I was agreeing with
the fact that those costs adding up to around £300 million
are mostly ones which I am afraid we carried into the public sector
comparator. That is undoubtedly the fact. Secondly, we do not
regard the fundamentals of the contract, if it had been operated
exactly as it should have been, unfavourable to HMRC. That is
not what our Report says. Being able to place contracts at will
when you wanted to move out should have been—should have
been—pretty useful. Is it impossible to replicate that in
the public sector? Well, I leave you to consider. I do not know
but I think that having it there and being able to do it at relatively
short notice without immediate penalty, assuming you wanted to
rationalise the estate, appeared to be a useful contractual form.
We are not fundamentally saying that is a bad contract. We are
saying we are talking about the way the contract has been conducted
not about the fundamentals of the contract itself.
Chairman: Thank you for that.
Q90 Geraldine Smith: You cannot voluntarily
terminate a contract, can you?
Ms Strathie: We have a shared
dependency here and there would be significant costs attached
to termination of that contract, if that were something we assessed
we wanted to do, particularly having assessed the costs anyway
if Mapeley were to become insolvent.
Q91 Geraldine Smith: In hindsight,
would you do that again?
Ms Strathie: Again I have to dwell
more on my own experience here. This is not our core business
and generally speaking you get better value, better flexibility,
able to do things more quickly in doing it this way. I cannot
judge, with all of the things the Department has been through
since the contract, how much it could have done sooner, but I
do know that it enabled the merger in the first instance, the
creation of HMRC, and the pace at which that Department was created
would have been much more difficult if we had not had this contract.
Q92 Geraldine Smith: So basically
you feel the contract was a good thing but you did not have people
with the legal skills and the commercial knowledge to negotiate
a better contract.
Ms Strathie: Yes and I also think
the contract was signed and I can only assume that it enabled
the things that it enabled because we were all living in a time
where we could see that lots of jobs were going to be replaced
by technology and that is always a real challenge for any leader
in the scale of change. You could have assumed that you were going
to need far fewer buildings because of the merger dividend. Lots
of assumptions were made but the reality is that a lot of other
things have been asked of HMRC in the meantime.
Q93 Geraldine Smith: May I ask one
question on page 14 where it mentions windfall gain? Mr Friedlos,
apparently the Department has not received a certificate from
Mapeley confirming that it was not eligible to share in windfall
gains. Can you tell me a bit about that and why the Department
has not received a certificate?
Mr Friedlos: The windfall gain
was looked at at the time it was required to be in the contract
and it was concluded and agreed with the Department that no gain
was payable. At the same time as that was going on, there was
also a refinancing of the bank arrangements around the STEPS contract
which was taking place which actually relied on largely the same
information and under which we did agree to make a payment to
the Department. That was duly done and the matter was considered
concluded in respect of both items. I understand the Department
would now like the certificate which is effectively for a nil
return, but they would like it. We are planning to provide that
to them as soon as possible.
Q94 Geraldine Smith: Going back to
the staffing, what is going to happen after 2012 with the buildings?
What is the situation?
Ms Strathie: We have a total of
258 buildings which we consulted on and which have a future of
different times and the 130 are the ones which we nailed down
as ceasing business that year. We then have outline views of the
next two years but they have to be taken in line with our workforce
and my budget because obviously the cost of exiting people from
the organisation is something we have to factor in. We are clear
for this and we are clear for funding for those staff who cannot
take advantage of any other vacancies and who take the exit terms,
which are the most generous available under the civil service
rules, before we can bring greater detail for the following years.
Q95 Geraldine Smith: Do you accept
the recommendations of this Report? I think it is the future which
is important and how you work within this contract.
Ms Strathie: Yes; absolutely.
Q96 Mr Davidson: Is there any advantage
to HMRC of Mapeley being offshore?
Mr Hartnett: The only one I can
think of is the one that was picked up in the last NAO Report
in that the best estimate is that Mapeley were able to bid £55 million
low because £55 million of capital gains tax would not be
paid because they were offshore.
Q97 Mr Davidson: Apart from dodging
the tax, is there any other gain in operational terms to HMRC
of you being based in Bermuda?
Mr Friedlos: No, there is not;
it is a very widely used structure in the industry.
Q98 Mr Davidson: So presumably the
only gain in this whole thing to the British Government of you
being offshore is that because you dodge tax you are able to quote
a lower price.
Mr Friedlos: We passed the tax
benefit back as a lower price in assembling our bid.
Q99 Mr Davidson: May I ask the NAO
whether or not there is any evidence that the benefit of dodging
the tax has been reflected in the lower price?
Ms Wheeler: The figure of £55
million which was quoted as an estimate had been reflected in
the bid. Within our Report we did actually try to get an assessment
about what the tax benefit had been so far and I believe the figure
was £2 to £3 million. However, that is on the basis
that much of the tax benefit would come towards the latter end
of the contract on that £55 million.
Q100 Mr Davidson: Because I do not
understand all of this, could we ask for a note from you about
the extent to which firstly there was a benefit to the Government
as a result of it being offshore and, secondly, whether or not
the company have played fair in terms of giving the price back.
Mr Morse: May I define it like
this and see whether this is helpful? If we have full access to
Mapeley's costs and their financial details then we can work out
what tax advantages they have obtained from being offshore. Only
if we know that can we know whether it is being shared back with
HMRC.
Q101 Mr Davidson: Is there any problem
about giving the NAO access to that?
Mr Morse: I cannot see how I can
do it otherwise.
Mr Friedlos: I have already given
an assurance here that we are committed to providing more information.
Mr Morse: I am not denying that.
Q102 Mr Davidson: I am just trying
to be clear. You mention you need access and I am just asking,
in the limited time I have available to ask questions, whether
or not that is a difficulty for you.
Mr Friedlos: It is not a difficulty.
Q103 Mr Davidson: Fine. So we should
in due course get something back clarifying all that for us.
Mr Morse: We will put something
together in cooperation with HMRC.
Q104 Chairman: That must be done
promptly before we publish our report.
Mr Friedlos: Yes; agreed.[10]
Q105 Mr Davidson: May I seek clarification?
A question has also been asked about whether you had ever been
asked about bringing the properties back to the UK and you said
you had never been asked. Can you just clarify that for me? If
the property ownership is brought back to the UK, does that then
negate the tax advantage or is there a different way of doing
it. I did not quite understand the significance of bringing the
properties back to the UK. Can you clarify that for me?
Mr Friedlos: Yes. If the properties
were brought back to the UK it would negate the £55 million
tax advantage which we have just been discussing.
Q106 Mr Davidson: If you did that,
you would seek to renegotiate the contract to bump the price up.
Mr Friedlos: We would need some
compensation for that benefit being given up.
Q107 Mr Davidson: That is the same
thing basically, is it not? That is helpful. To what extent is
this company a bit like the Royal Bank of Scotland in that it
is too big to fail? If you are negotiating with it and they come
to you and say "Look, things are hard, you have to be a bit
softer on us because otherwise we will be pushed into bankruptcy
and then you will end up with all sorts of costs", is that
an accurate representation of the position or do they have a bottomless
pit of money and you can just hold them to the terms of the contract?
Ms Strathie: I can only speak
about my experience on the work I have done since I have been
in HMRC. I am absolutely clear that HMRC is not a soft touch here.
I am clear that what we are asking for is no more than the contract
entitles us to ask for. Mapeley is accepting that and the challenge.
I do know broadly the cost were this to revert to us but I actually
believe that there is much value to be extracted and I would not
accept under any circumstances Mapeley saying they had real financial
difficulty and expecting the taxpayer to help out if I did not
have full visibility over finances.
Q108 Mr Davidson: They have refinanced
themselves a couple of times, have they not, in one way or another
so presumably they could do a bit of moving things around which
would put them in a position as some of the building societies
and banks did that meant they had to be bailed out.
Ms Strathie: We have not had to
cross that bridge, which is good. I think you know from the business
payment support service that HMRC put in place at the start of
the recession that lots of companies have come to us for support
in our time-to-pay arrangements. The law is pretty clear on all
of this. We work with people to bring them into compliant regimes
provided they are a viable business. We all know the history of
the banks.
Q109 Mr Davidson: Yes, but there
is a slight difference between bringing them into compliance in
terms of being your customers, so to speak, as distinct from you
being their customer.
Ms Strathie: Yes, but in the recession
we recognised, particularly while we were dealing with the banks,
that there are cash flow issues for business and we were doing
our best to support. Mapeley is a business too. What I am saying
is that I cannot see us being in a position where we would be
looking for public money to bail Mapeley out. We would have to
take on the costs and manage the risks according to the plans
we have.
Q110 Mr Davidson: Mr Friedlos, what
security can we feel that you will not come to HMRC in a little
while and say that the market is tough and you cannot meet the
terms of the contract? In terms of the way in which some of the
deal was done at the beginning, we have heard suggestions that
you were sharks which took advantage of the gullible to some extent.
This was before Ms Strachie was there and no doubt you were dealing
with other people from private schools and Oxbridge who were not
aware of the ways of the world. How do we know that you are not
going to be up to bad things later on?
Mr Friedlos: When we came to the
departments at the outset of the contract, we settled some money
in respect of errors in the data and additional services which
we were being asked to provide and that was settled some years
ago. We do not expect to come back to the Government asking for
any more money outside what we are entitled to under the contract.
We have looked at the Department's vacation plans.
Q111 Mr Davidson: So no relaxation
of the contract.
Mr Friedlos: We will not be asking
for relaxation of the contract.
Q112 Mr Davidson: You have already
done that once, have you not?
Mr Friedlos: No, we have not asked
for a relaxation of the contract.
Q113 Mr Davidson: So what was it
you asked for? Did you not come back and ask for something some
time ago?
Mr Friedlos: We asked for some
additional payments in respect of errors in the original bid data
and where we were providing services in addition to those bid
for.
Mr Hartnett: May I add a point
which I think is really important here? Turning to the other side
of HMRC's work, monitoring companies and taxpayers and the like,
one of the things we often see is that property companies do not
have a lot of equity in the actual property. It is different here.
Mr Friedlos knows a great deal more than I do about this
but what is clear to HMRC from work we have done recently is that
there is equity in the properties that Mapeley hold that we use.
I just wanted to make the point that it is really important to
bear this in mind.
Q114 Mr Davidson: Thank you. May
I ask about the refinancing gain of 30% and that has been agreed
going forward? May I ask the Treasury or NAO whether or not that
is a reasonable figure or would you normally expect it to be more?
Ms Wheeler: That was broadly in
line with guidance, albeit that there was no provision in the
contract for this gain. Then new Treasury guidance came out and
that was viewed as appropriate. It is reasonable.
Q115 Mr Davidson: So that is a reasonable
figure.
Ms Strathie: It is very reasonable
and something we are not entitled to under the contract so it
should be seen in that light as a real positive.
Mr Davidson: So Mr Friedlos is not as
bad as we thought possibly.
Q116 Chairman: Mr Friedlos may I
just return to Mr Bacon's question about the nature of your
company. I am curious. How many people do you employ in Bermuda?
Mr Friedlos: We do not employ
any people in Bermuda. Our investments are owned in Bermuda and
we have a board of directors in Bermuda who make decisions.
Q117 Chairman: You have a board of
directors. Do these people live in Bermuda?
Mr Friedlos: Yes, they are resident
in Bermuda.
Q118 Chairman: But you are resident
here and you pay tax here.
Mr Friedlos: Yes, I am resident
here and I pay tax.
Q119 Chairman: So all your staff
are employed here.
Mr Friedlos: They are.
Q120 Chairman: I am not in this high
finance world; it is not our sort of world. Is this not all a
bit odd that this chap seems to be paying tax here, working here
having all his people here but he is an offshore company. I am
very naive. Could you give me some help as a taxpayer?
Ms Strathie: The help I am going
to give you is in the form of Mr Hartnett, the Permanent Secretary
for Tax. It is something that I have had to get my head round
along with all the rest of the learning about tax products.
Q121 Chairman: How can I become an
offshore company then?
Mr Hartnett: Set one up.
Q122 Chairman: I am a bit fed up
with paying taxes as well.
Mr Hartnett: Let me try to unpick
it a little for you. Some of the Mapeley group of companies are
actually onshore in the UK but the investment is offshore. Holding
property in an offshore entity like this has been a common feature
of property ownership in the United Kingdom for many, many years.
Personally the first time I saw this as a tax inspector was 25
years ago and I did just check this morning the figure that Ms
Strathie came out with which is that 82% of commercial property—I
think it was last year—in London was held in an offshore
structure. Whilst I cannot, for reasons we are all aware of, say
anything about our advice to ministers, successive governments
have looked at this on a number of occasions. That is how property
is held. If I may, as someone who was around when the contract
was made, the thing I regret most is that those working on that
contract took legal advice and were told that tax planning, tax
avoidance of this sort, was not a reason not to go into the contract
and it is a matter of history that the Board of Inland Revenue
at the last minute and the Board of Customs afterwards learned
that.
Q123 Chairman: That is one thing
we find very difficult to understand. How could you just learn
this at the last minute? You seem to be giving the impression
that this is quite common.
Mr Hartnett: It is very common.
Ms Strathie: It is common.
Chairman: It is very common so you would
have suspected, you as a serious department, full of very bright
people, that this might have been the case, but it seems not.
Q124 Mr Davidson: I take it Mr Friedlos
did not point this out to them during the negotiations.
Mr Friedlos: They were aware of
it during the negotiations.
Mr Hartnett: Absolutely.
Q125 Mr Bacon: The Report says that
the Revenue was but at the point of contract signature the Board
of Customs and Excise was not.
Mr Hartnett: I think the record
from previous hearings says that the Board of Customs and Excise
did not know at the point of signature. The Board of Inland Revenue
learned four days before signature and legal advice was obtained
from senior counsel in those four days.
Q126 Mr Bacon: From whom did they
learn this? Who told them? Was it you?
Mr Hartnett: It was.
Q127 Mr Bacon: What was their reaction?
Mr Hartnett: What happened—and
this is going back in a history a little bit—is that the
Chairman of the Board of Inland Revenue was not available to sign
the contract.
Q128 Mr Bacon: Was this Mr Varney?
Mr Hartnett: No, Sir Nicholas
Montagu.
Q129 Chairman: Sir Nicholas Montagu
was not available.
Mr Hartnett: Not available because
the contract signing was delayed. I as a commissioner was asked
to sign in his place and I asked what structure we were selling
into. That is when the Board of Inland Revenue learnt.
Q130 Mr Bacon: It rather reminds
me of a story told by a parliamentary colleague of mine who signed
the Maastricht Treaty because Norman Lamont was very conveniently
not around on the day. I have one question about this 82% figure.
You are saying that 82% of commercial property in the United Kingdom
is owned through the structure.
Ms Strathie: In London.
Mr Hartnett: In London.
Q131 Mr Bacon: If I am on the continent
and I fly in over London and see all of London laid out before
me as you do on a sunny day, roughly 820 out of every 1,000 office
buildings are owned in this type of way.
Mr Hartnett: Transactions in one
year. I referred to the year before last but is has been prevalent—
Q132 Mr Bacon: But if it has been
like that for 25 years then typically—you only have
to go round the City of London to see how often holes are being
dug and offices are being rebuilt—it would be fair to say
that the vast majority of buildings you fly over and look at which
are commercial property buildings in London are owned in this
type of way; that is what you are saying.
Mr Hartnett: Yes.
Q133 Mr Davidson: So if I flew into
Hamilton in Bermuda I would be able to look out of the window
and say "I can see the nameplates of 82% of the property
in London down there".
Ms Strathie: They are not necessarily
all in Bermuda.
Q134 Mr Bacon: If that is the case
that 820 out of every 1,000 commercial buildings are owned in
this type of structure, I would not wish to incite you into suggesting
what advice you might give to ministers as you just mentioned
but has it occurred to anyone that the reason for this might be
that the environment here from a tax point of view for commercial
property is so unattractive that it causes this to be the case
and that a slightly different environment might encourage them
all to come back onshore?
Mr Hartnett: I do not know the
answer to that question. There has been a lot of analysis by various
policy teams over the years on this tax issue but it is as it
still is.
Q135 Mr Bacon: What proportion of
public sector buildings are owned in this way?
Mr Hartnett: I do not know the
answer to that question.
Q136 Mr Bacon: Can you find out and
let us know?
Mr Hartnett: I am not sure we
can but we will try.[11]
Q137 Chairman: As a result of using
an offshore company how much tax have you lost?
Mr Hartnett: We think at the moment—and
it is a best estimate—that so far £2.5 to £3.5
million of capital gains tax that might have been paid in different
circumstances has not been paid.
Q138 Mr Davidson: But the estimate
is still that it would be £55 million over the period of
the contract.
Mr Hartnett: If I may, it is worth
going back to the last NAO Report and just one line "The
location of Mapeley STEPS Limited in Bermuda has no material effect
on the overall value for money of this deal to the UK taxpayer".
That was the NAO conclusion then.
Mr Morse: Just to make sure I
have understood this, you think the tax liability that might have
arisen would have been on the HMRC estate, the amount you mentioned,
the £200 million.
Mr Hartnett: No, £2.5 to
£3.5 million.
Mr Morse: Just out of curiosity
and I am not entitled to ask questions but if I might be indulged
in this one thing, Chairman, looking at all of that estate how
much tax are we losing to the UK Exchequer by not having it onshore?
Mr Hartnett: Capital gains tax
or corporation tax will not be paid by an offshore company when
it disposes of the property. The property market has been pretty
volatile during the life of this contract and it would be interesting,
when we get to look at all the details, to see losses and gains
but our best estimate if £2.5 to £3.5 million has been
lost, if that is the right word, so far.
Q139 Chairman: Mr Hartnett, Ms Strathie,
Mr Friedlos that concludes our hearing which has been very
interesting. Whatever tax has been lost clearly the reputational
damage to your Department has been great and lessons will have
to be learned for the future. It is not just the reputational
damage which has been caused, in our Report we will express concern
about the fact that you have no detailed plan for vacating properties
and we will obviously want to return to this question of value
for money, we will want to stress the fact that you paid £300
million more than you planned and the overspend is expected to
rise to £570 million by the end of the contract. I am afraid
that this will not be one of your finest calls. Do you want one
last comment?
Ms Strathie: We welcome the NAO
Report and thank you for the hearing.
Chairman: Thank you very much; that concludes
our hearing.
1 Ev 14 Back
2
Ev 15 Back
3
Note by witness: This figure is revised to 3,150. Back
4
Note by witness: This figure is revised to 1,450. Back
5
Note by witness: This figure is revised to 1,700. Back
6
Ev 15 Back
7
Ev 15 Back
8
Ev 16 Back
9
Ev 16 Back
10
Ev 16 Back
11
Ev 16 Back
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