Conclusions and recommendations
1. The Department's refusal to disclose taxpayer
information prevents proper scrutiny of the process for reaching
tax settlements with large companies.
We accept there is a need for confidentiality to protect taxpayers,
but this must not be used as a cloak to protect the Department
from scrutiny. It is absurd that we have been forced to rely on
information in the media to find out about cases that raise concerns,
and of course we only know about cases on which information has
been published in the media. The Department was not able to point
to an absolute statutory bar on disclosure of information about
specific cases. Its withholding of information is in fact a policy
decision taken by Commissioners. This approach fails to give proper
regard to HMRC's duty to assist the Public Accounts Committee
in examining whether or not the Department is giving best value
for money. There is less justification for keeping tax information
about large corporations confidential than information about individuals.
The Department must set out in greater detail its policy reasons
for not disclosing information about specific corporate taxpayers.
It must explain the circumstances in which it would consider disclosure
and it must set out how it will fulfil its statutory obligations
to account for its actions to Parliament.
2. The evidence of the Department's senior
officials fails to give us any confidence in the way large settlements
are reached. The Permanent Secretary for
Tax and the Department's General Counsel and Solicitor failed
to answer our questions about specific cases in a spirit of openness.
Some of the evidence they provided about the exact order of events,
the extent of the Permanent Secretary for Tax's personal involvement
in negotiations and whether legal advice was sought and acted
upon was imprecise, inconsistent and potentially misleading. Furthermore,
the Permanent Secretary for Tax was less than clear and consistent
in the evidence he first gave to the Treasury Select Committee
and then to the Public Accounts Committee. Accounting Officers
are accountable to this Committee and we expect precise, open
and comprehensive answers to our questions. Any failure to do
so is a failure to perform a core responsibility and should be
treated as such by the Cabinet Secretary.
3. The Department chose to depart from normal
governance procedures in several cases, which allowed Commissioners
to sign off on settlements that they themselves negotiated.
HMRC execute hugely important functions on behalf of the taxpayer
and the Government. It is absolutely necessary that the officials
responsible for and engaged in this work should have the necessary
skills, qualifications and experience to fulfil these vital roles.
For four of the largest settlements examined by the Comptroller
and Auditor General, the processes applied did not recognise the
importance of clear separation between those negotiating and those
approving settlements, and we are not convinced of the soundness
of decisions made by Commissioners in these cases. The Department
has since put in place new governance arrangements that seek to
separate the negotiation and authorisation roles. The recent appointment
of two new Commissioners widens the pool of Commissioners who
have the expertise to make an informed judgement in signing off
settlements. However, this does not in itself guarantee there
will be effective separation of roles or proper accountability
for decisions reached, not least because the two new Commissioners
are existing members of the Department's senior team. The Department
must ensure that its revised procedures to separate out the roles
of those involved in settling tax disputes are applied to all
cases without exception. The Department should report back to
us, as promised by the Cabinet Secretary, before Christmas.
4. Governance procedures have lacked the independence
and transparency needed to provide sufficient assurance to Parliament.
Tax settlements with large companies are
inevitably complex and involve the exercise of judgement. Parliament
needs assurance that these settlements are appropriate and good
value for the taxpayer. We welcome the Department's proposals
to introduce an independent assessor, or assessors, to sit alongside
Commissioners, who would carry out independent review of settlement
proposals. Appropriate rules need to be established which will
ensure that all settlements over £100m are assessed independently
and that a random sample of those over £10m are assessed
independency each year. It is important that the new role is demonstrably
independent and increases accountability to Parliament, and should
be established in statute. For speed, we accept that the role
should be set up in shadow form, but it should be formalised in
legislation as quickly as possible. Independent assessors should
report annually to Parliament on their work, perhaps in a statement
contained in the Department's annual report and accounts. This
should include aggregate information on the cases in which they
were involved and a report on any settlements where they have
identified concerns.
5. The Department's failure to comply with
its own processes resulted in a substantial amount of money being
lost to the Exchequer. In one case, a
mistake was not picked up until too late because the Department
failed to follow its own governance procedures. The C&AG told
us that this resulted in a loss of up to £8 million in interest
forgone. We have since received evidence from a whistleblower
that the total value of interest payable in respect of this particular
settlement could be as high as £20 million. When the error
was eventually picked up, the Department decided it would not
reopen negotiations. We are astonished that in this case the decision
to settle was taken without legal advice and that the Department
did not even take the most basic step of making its own note of
meetings with the company concerned, relying instead on the record
kept by the company. The Department must ensure that it has applied
all relevant governance checks to each settlement before finalising
them with taxpayers. It must also consult legal advisors before
settling cases in litigation and make sure it keeps its own accurate
and complete records of key meetings with companies. We remain
concerned that the decision was taken not to reopen this case
when the 'mistake' was uncovered, and we were not given good reasons
for HMRC not reopening this case.
6. Those at the top of the Department have
not taken personal responsibility for serious errors. The
failure to apply proper governance processes is the latest in
a series of errors made by the Department in recent years, including
the debacle over PAYE and tax credits. There appears to be little
or no sense of personal accountability when things go wrong. It
is right that an individual was held accountable for his role
in the mistake that led to the loss of interest on a tax liability,
but there also needs to be stringent accountability at the top
of the Department for designing and operating a system in which
such mistakes could occur. We expect leaders to take responsibility
for both systemic issues and for specific mistakes, for which
they are accountable.
7. The Department has left itself open to
suspicion that its relationships with large companies are too
cosy. The Permanent Secretary for Tax
attended a significant number of informal meetings over lunch
and dinner with large companies with whom HMRC was settling complex
tax disputes, when formal HMRC minutes were not necessarily taken.
We were told this was part of the Department's overall approach
to relationship management. We accept that senior tax officials
need to be accessible to major stakeholders and we welcome the
fact that details of hospitality are published, but this information
is only meaningful if supported by transparency about the Permanent
Secretary for Tax's involvement in settling disputes with these
companies. It appears that when deciding whether or not to accept
hospitality, not enough attention was paid to the risk that a
conflict of interest might be perceived. The Department must exercise
better judgement over how it manages its relationships with large
companies, to ensure it avoids the perception of conflicts of
interest.
8. The Department is not being even handed
in its treatment of taxpayers. It is unfair
that large companies can settle their tax disputes with the advice
of professionals at less than the full amount due and that they
have been allowed up to 10 years to pay their tax liabilities,
while small businesses and individuals on tax credits are not
allowed similar leeway. The Department has promised to look into
the treatment of these groups of taxpayers in terms of its fairness
and reasonableness. It should report back to us on any actions
taken to address the wider policy or process issues identified
as a result of its examination.
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