HM Revenue & Customs 2010-11 Accounts: tax disputes - Public Accounts Committee Contents


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.[36] 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.[37] 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.[38]

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.[39]

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.[40] The Department has promised it will not set up bespoke governance arrangements in future, given the concerns raised by the four cases.[41] 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 authorising them.[42]

16. We were astonished to learn that the Permanent Secretary for Tax was the only Commissioner with "deep" tax knowledge.[43] 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.[44] We welcome the appointment of two new Commissioners, one of whom is a tax professional and has extensive tax knowledge.[45] 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 reached.

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.[46] 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 assurance.[47]

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.[48] 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.[49] 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 timetable allows.[50]

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.[51] 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 concerns.

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.[52] The Department has admitted that its failure to charge interest on the liability was a mistake.[53] It also admitted that the failure to fully apply its own governance procedures in this case was a further mistake.[54] 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.[55] 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.[56]

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.[57] The General Counsel and Solicitor told us that as part of his advice, he had expressed a personal preference for not reopening the settlement.[58] The Permanent Secretary for Tax accepted this advice and did not reopen the settlement.[59] 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.[60]

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.[61] 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.[62]

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.[63] Instead, the Department relied upon a note produced by the company itself.[64] 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.[65]


36   Qq 83-86, 137; C&AG's Report, para 11 Back

37   Q 165 Back

38   Qq 79-82 Back

39   Q 230 Back

40   Q 152 Back

41   Ev 68 Back

42   Qq 144-145, 148, 665-667; Ev 68 Back

43   Q 157 Back

44   Q 159 Back

45   Qq 166-168 Back

46   Q 662 Back

47   Qq 228,  Back

48   Q 667 Back

49   Q 679 Back

50   Qq 674-675 Back

51   Qq 698-699 Back

52   Q 121 Back

53   Qq 22, 27 Back

54   Qq 719, 728 Back

55   Qq 719, 723 Back

56   Q 724 Back

57   Qq 266, 542,545 Back

58   Qq 602-605 Back

59   Qq 714-715 Back

60   Qq 126, 269, 734 Back

61   Qq 250, 548-550 Back

62   Qq 549-550 Back

63   Qq 740-743 Back

64   Qq 713, 741,743 Back

65   Qq 17-19, 740-742 Back


 
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Prepared 20 December 2011