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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