HM Revenue and Customs' estate private finance deal eight years on - Public Accounts Committee Contents

4  Contracting with an offshore company

18.  Eighty per cent of the shares in Mapeley were owned by funds managed by the Fortress Investment Group, with 20% owned by management, individuals and professional investors. In June 2005 Mapeley was floated on the London Stock Exchange, but de-listed in April 2009 as Fortress held more than 75% of the equity. Mapeley's investments were held offshore and its Board of Directors were resident in Bermuda, but operational decisions were taken in the UK.[22]

19.  The freehold and long-leasehold properties transferred under the deal were held by a subsidiary company based offshore (Mapeley STEPS Limited). As a result, gains from selling the properties would not be subject to UK tax. Furthermore, as Mapeley's shareholders were also based offshore, they would not be liable to UK tax if they sold their shareholdings. Mapeley estimated that if it had been required to hold the properties onshore, the contract price would have increased by £55 million (in present value terms) to cover extra UK tax that may have been due. Mapeley told the Committee that it had passed on to the Department the tax advantages in a lower priced bid and agreed to demonstrate this by providing the National Audit Office with access to relevant financial information.[23]

20.  As recognised in current HM Treasury guidance (see paragraph 24) there is unlikely to be any overall benefit to the Exchequer from the offshore arrangements as reductions in price paid by the Department would be accompanied by reduced tax revenues. It remains uncertain whether Mapeley will obtain tax savings that are higher or lower than originally anticipated over the 20 years of the contract.[24]

21.  Offshore ownership was a widely used structure in the property industry. The Board of the Inland Revenue only discovered that Mapeley intended to hold the properties offshore four days before signing the contract, and the Board of HM Customs & Excise did not find out until after it signed the contract. At the time, the two Departments concluded that it would not have been lawful to exclude Mapeley from the procurement on the basis of its tax arrangements.[25]

22.  If Mapeley were to transfer ownership of the properties back into the UK, this would negate the tax advantage, and although Mapeley would consider bringing ownership onshore if asked, it would require compensation from the Department. The Department had not asked Mapeley to transfer ownership onshore.[26]

23.  The issue of offshore ownership has not only damaged the Department's reputation, it has also affected management of the contract. Concerns about offshore ownership have led to delays in including in the contract additional buildings that the Department has used since 2003. The delay on the first group of properties has meant:

  • it did not get additional vacation allowances for these properties. The immediate impact has been that it will have to pay compensation under the contract for some of its planned vacations;
  • it has had to continue to carry out estate management functions itself, and
  • it had not begun negotiations to bring in other additional properties.[27]

24.  HM Treasury guidance now required that public sector organisations should avoid using tax advisers or tax avoidance schemes, as any apparent savings could only be made at the expense of other taxpayers or other parts of the public sector. Treasury approval would therefore normally be required because such transactions were likely to be novel or contentious. The Treasury now required central government bodies to:

  • base procurement decisions independent of any tax advantages that may arise from a particular bid;
  • restrict contractors' use of offshore jurisdictions, consistent with EU and other international obligations and the government's stated objectives on tax transparency and openness, to avoid harmful tax competition, and
  • employ internal management processes to ensure that transactions that give rise to questions of propriety of tax arrangements are brought to the Accounting Officer's or, if necessary, Ministers' attention.

25.  Public procurement projects involving the transfer of real estate or assets that were likely to appreciate in value could often give rise to specific tax issues. HM Treasury guidance advised organisations to consult the Treasury at an early stage to identify the likely tax implications and assess the proposal for propriety generally.[28]

22   Qq 45-46, 47, 50-51, 116-117 and 119 Back

23   Qq 96-102 and 137; HC (2004-05) 553, paras 1and 5; C&AG's Report, paras 1.14 and 2.13-2.14 Back

24   Ev 16 Back

25   Qq 18, 97, 122-123, 125 and 131-132; C&AG's Report, para 2.13 Back

26   Qq 20, 105 and 106 Back

27   Q 21; C&AG's Report, paras 2.12, and 2.16-2.17 Back

28   HM Treasury, Managing Public Money, October 2007, paras 4.2 and 4.27, Annex 4.4; C&AG's Report, para 2.13 Back

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