3 Inadequate governance arrangements
13. In four of the largest tax settlements examined
by the Comptroller and Auditor General, the Department decided
not to apply normal governance arrangements and operated "bespoke"
governance arrangements instead.
In three of these cases, there was no proper separation between
the negotiation and approval of the settlement because one or
both of the Commissioners signing off the settlement had also
been involved in the negotiations.
In the case where an error was made leading to the loss of interest
due on the settlement, the Permanent Secretary for Tax was one
of the Commissioners who approved the settlement despite being
involved in reaching the settlement.
14. The C&AG is undertaking further work to examine
the reasonableness of some of the larger settlements. This will
cover the settlements where the Department's governance arrangements
did not provide adequate assurance, including those cases where
the Commissioners who signed off the settlement also participated
in the negotiations. Where necessary, the C&AG will commission
expert tax advice. He has undertaken to report the results of
this work to us in a private, confidential session. The Department
has agreed to support the C&AG's work and to provide answers
to our questions on these cases in the confidential session.
15. The Permanent Secretary for Tax has already accepted
that bypassing normal governance arrangements resulted in a lack
of objective assurance about the settlements reached.
The Department has promised it will not set up bespoke governance
arrangements in future, given the concerns raised by the four
cases. The Department
has also put in place new governance arrangements, which require
the two Commissioners formally approving a settlement to have
had no role in negotiating that settlement. The new arrangements
are designed to ensure that, for the cases where a Commissioner
is involved in the negotiation process, there is a clear separation
of roles between those involved in reaching settlements and those
16. We were astonished to learn that the Permanent
Secretary for Tax was the only Commissioner with "deep"
tax knowledge. This
makes it difficult to see how sign-off by the other three Commissioners
could have been an informed and effective check on large settlements.
We welcome the appointment of two new Commissioners, one of whom
is a tax professional and has extensive tax knowledge.
This starts to widen the pool of Commissioners with the expertise
to make an informed judgement on settlement proposals, but is
not sufficient to secure that there is always proper separation
between the negotiation and approval of settlements.. However,
the Department must make sure that procedures to separate these
roles are applied to every case without exception, in order to
provide the necessary degree of assurance over the settlements
17. We have residual concerns about the absence of
real independence in the Department's governance arrangements.
Commissioners are not able to provide completely independent oversight
of settlements because they are senior executives responsible
for running the Department, including the design and operation
of processes for resolving disputes.
Similarly, the members of the High Risk Corporates Programme Board,
who exercise another important governance check, are all staff
members of the Department and so cannot provide entirely independent
18. The proposal to appoint an assessor or assessors
from outside the Department to provide independent review of large
settlements could provide the important external assurance that
is currently missing.
However, this assurance can only be delivered if the role is set
up to be demonstrably independent of the Department. The assessor
role should be established by primary legislation to guarantee
its statutory independence.
However, we are also keen that the role be created as quickly
as possible. There are precedents for a two-stage process that
the Department should explore, setting the function up in shadow
form first with legislation following as soon as the parliamentary
19. The independent assessor role has the potential
to increase the Department's accountability to Parliament. Appropriate
arrangements need to be agreed so that all settlements over £100m
are independently assessed, and a random sample of settlements
below £100m are regularly assessed independently each year.
The assessors should be required to report on their work to Parliament,
which could be done through providing an account of their activities
in the Department's annual report and accounts laid before Parliament.
This should summarise their work for the year and include aggregate
information on the number and value of cases reviewed and the
results of their examination of cases. The assessors should also
report by exception on any settlements where they have identified
20. The importance of following established governance
procedures is well illustrated by the case which resulted in a
loss of interest. The C&AG told us this resulted in a loss
of up to £8 million, although evidence we subsequently received
from a whistle-blower suggests it could be as high as £20
million. The Department
has admitted that its failure to charge interest on the liability
was a mistake. It
also admitted that the failure to fully apply its own governance
procedures in this case was a further mistake.
The case should have been referred to the Programme Board before
settlement was agreed with the company, but this was only done
after the settlement had been negotiated with the taxpayer.
When the Programme Board did eventually consider the case, it
rejected the settlement that had been reached because of the failure
to claim interest and then referred the case to Commissioners
for their consideration.
21. Having discovered the financial mistake, the
Permanent Secretary for Tax sought advice from the General Counsel
and Solicitor on the courses of action open to the Department.
The advice received was that the Department had two options: it
could revisit the settlement, or simply accept that a mistake
had been made and not pursue the interest owed.
The General Counsel and Solicitor told us that as part of his
advice, he had expressed a personal preference for not reopening
the settlement. The
Permanent Secretary for Tax accepted this advice and did not reopen
the settlement. As
set out in the previous section of this Report, we were unable
to secure answers to our questions as to why this course of action
was followed, and we remain concerned that value for money was
therefore not secured for the taxpayer.
22. This case highlighted significant shortcomings
in the Department's procedures for reaching settlements of tax
disputes. The team negotiating the case failed to consult the
lawyers involved in litigating the case before they concluded
the settlement. As
the General Counsel and Solicitor himself acknowledged, it would
be normal practice for the team negotiating a settlement to have
consulted the litigating lawyers, and they should have done so
in this case.
23. The Department did not produce a written note
of the 19 November 2010 meeting with the company, despite the
fact that this was the meeting where the settlement of the dispute
was reached. Instead,
the Department relied upon a note produced by the company itself.
It is astonishing that the Department neglected to make its own
record of such an important meeting. It is even more astonishing
that the Permanent Secretary for Tax did not even know whether
a note existed or not.
36 Qq 83-86, 137; C&AG's Report, para 11 Back
Q 165 Back
Qq 79-82 Back
Q 230 Back
Q 152 Back
Ev 68 Back
Qq 144-145, 148, 665-667; Ev 68 Back
Q 157 Back
Q 159 Back
Qq 166-168 Back
Q 662 Back
Qq 228, Back
Q 667 Back
Q 679 Back
Qq 674-675 Back
Qq 698-699 Back
Q 121 Back
Qq 22, 27 Back
Qq 719, 728 Back
Qq 719, 723 Back
Q 724 Back
Qq 266, 542,545 Back
Qq 602-605 Back
Qq 714-715 Back
Qq 126, 269, 734 Back
Qq 250, 548-550 Back
Qq 549-550 Back
Qq 740-743 Back
Qq 713, 741,743 Back
Qq 17-19, 740-742 Back