HC 1531 Public Accounts CommitteeFurther written evidence from the Permanent Secretary for Tax, HM Revenue and Customs

I thought it would be helpful, in the light of the discussions we have been having with the Committee, to provide more information about HMRC's current governance framework for resolving tax disputes and briefly to outline some additional changes we are considering.

HMRC first published its Litigation and Settlement Strategy (the LSS) in 2007 and in July this year published an updated version. There has been no change in the principles underpinning the Strategy, however. All disputes must be resolved in accordance with the law; HMRC does not "split the difference" with the taxpayer or enter into "package deals" in which one issue is traded off against another.

In many cases, HMRC believes there is one clear answer as to how tax law applies to an issue in dispute: in those cases, if the taxpayer is not willing to concede the point in full, HMRC will litigate the case. In other cases, because the application of tax law to a particular set of complex circumstances is not straightforward, there may be more than one possible answer as to how the issue in dispute should be resolved. The LSS recognises that possibility but makes clear that any resolution of the issue must be consistent with the law and represent an outcome that we would expect from litigation. Similarly, the LSS make clear that if, in the light of the facts of the case, HMRC does not have strong arguments on an issue in dispute, we should concede the point.

Governance of Tax Disputes

To underpin this strategy, we have developed governance processes which capture all our major cases. These processes are set out in our guidance. Our arrangements are already audited by our Internal Audit function. Their reports are considered by the Audit and Risk Committee of the HMRC Board. The Audit and Risk Committee is chaired by a non-executive member of the Board and all other members are non-executives. The National Audit Office has full access to all our papers and also attends all its meetings.

The vast majority of cases worked across HMRC where there is a difference of view with the taxpayer can be worked within the framework of our guidance because they do not raise novel or complex issues. Line managers are responsible for assuring the quality of the work that is done. For cases that do raise novel or complex issues, or where there are significant amounts of tax at stake, the lead case worker will bring in the relevant technical specialists (and legal advisers where necessary). The LSS states that HMRC's stance on an issue should be agreed between all the relevant parties. Where consensus cannot be reached, the issue should be escalated up the line management chain for agreement.

For our largest cases, chiefly our large business cases, there are specific governance arrangements to ensure that senior officials sign off proposals for resolving the issues in dispute. The High Risk Corporates Programme (HRCP) comprises a small number of specific high value cases in which a number of issues are in dispute with a business, typically where debate has been continuing for some time. The Programme represents a commitment on both sides to resolving those issues to an agreed timetable. Decisions on the cases in the Programme are taken by the Programme Board, which comprises Directors from a range of business areas, including the Solicitor's Office. In the rare event where the Board cannot reach consensus, the matter is escalated to the HMRC Commissioners.

The Managing Complex Risk Programme is a similar programme of work to manage cases of slightly lower value outside the Large Business Service.

The HRCP Board also has another role in our governance processes. For any large business case where the total tax under consideration exceeds £100 million, or which is particularly sensitive, proposals for resolution, whether by agreement or through litigation, must be signed off by the HRCP Board. For cases where the tax under consideration exceeds £250 million or the issues are exceptionally sensitive, the HRCP Board makes a recommendation to the HMRC Commissioners, who must agree the proposals for resolution. In a very small number of cases, different governance arrangements were agreed in the past, for reasons specific to the particular case, but we will not do that going forward.

One further aspect of our governance arrangements is worth noting. HMRC has arrangements in place to agree how it is prepared to resolve specific issues where the same point arises in several cases. Typically, this happens where an avoidance scheme has been used but the issue could also be a technical one. Through the Counter Avoidance Group and other panels, the relevant HMRC business areas agree the basis on which an issue may be resolved, setting a framework within which individual cases are worked, including those in HRCP. This is to ensure consistent outcomes for the same issue across different taxpayers.

The National Audit Office View

The arrangements set out above have been described by the National Audit Office (NAO) as providing "strong" governance in ensuring effective and consistent implementation of the Litigation and Settlement Strategy (LSS). The NAO also recommended some improvements, designed in particular to ensure clear separation between the analysis and negotiation phase of resolving a dispute and the approval of the proposed settlement. We have already adopted the NAO's recommendations.

Further improvements

We have listened to the points made to us by the Committee and we are considering what more we might do to ensure greater transparency about how decisions are taken and to improve accountability to Parliament, without compromising the fundamental principles of taxpayer confidentiality or HMRC's independence from the political process when it comes to decision-making in individual cases.

I have described above the LSS framework within which we work. To build on that, we are considering the following proposals:

Updating and improving the visibility of our governance arrangements in this area, incorporating the improvements recommended by the NAO.

Supporting the NAO in their further work to examine the reasonableness of some of the settlements in larger cases, which could act as a pilot for incorporating a test of a sample of cases into the regular pattern of NAO audits.

Giving a clearer aggregate picture in our Annual Report and Accounts of the additional revenue secured through our process for resolving disputes.

Bringing in additional non-executives with significant tax experience to have a role in reviewing and assuring significant settlements. Hitherto, the role of our non-executives has been to challenge and assure the Department's strategies and management, rather than to assure specific tax decisions.

We will be happy to discuss these ideas with the Committee on Monday. They will require a good deal more work and consultation, which we aim to do before the end of the year. We will, of course, keep you informed of progress.

Finally, you wanted some background material on the role of HMRC's Commissioners as set out in legislation. I have attached the relevant sections of the Commissioners for Revenue and Customs Act 2005 in an Annex. We would be happy to provide more detail if you wish.

4 November 2011



Section 1

The Commissioners

(1) Her Majesty may by Letters Patent appoint Commissioners for Her Majesty's Revenue and Customs.

(2) The Welsh title of the Commissioners shall be Comisynwyr Cyllid a Thollau Ei Mawrhydi.

(3) A Commissioner:

(a)may resign by notice in writing to the Treasury, and

(b)otherwise, shall hold office in accordance with the terms and conditions of his appointment (which may include provision for dismissal).

(4) In exercising their functions, the Commissioners act on behalf of the Crown.

(5) Service as a Commissioner is service in the civil service of the State.

Section 5

Commissioners' initial functions

(1) The Commissioners shall be responsible for:

(a)the collection and management of revenue for which the Commissioners of Inland Revenue were responsible before the commencement of this section,

(b)the collection and management of revenue for which the Commissioners of Customs and Excise were responsible before the commencement of this section, and

(c )the payment and management of tax credits for which the Commissioners of Inland Revenue were responsible before the commencement of this section.

(2) The Commissioners shall also have all the other functions which before the commencement of this section vested in:

(a)the Commissioners of Inland Revenue (or in a Commissioner), or

(b)the Commissioners of Customs and Excise (or in a Commissioner).

(3) This section is subject to section 35.

(4) In this Act "revenue" includes taxes, duties and national insurance contributions.

Section 9

Ancillary powers

(1) The Commissioners may do anything which they think:

(a)necessary or expedient in connection with the exercise of their functions, or

(b)incidental or conducive to the exercise of their functions.

(2) This section is subject to section 35.

Section 11

Treasury directions

In the exercise of their functions the Commissioners shall comply with any directions of a general nature given to them by the Treasury.

Section 12

Commissioners' arrangements

(1) The Commissioners shall make arrangements for:

(a)the conduct of their proceedings, and

(b)the conduct of the proceedings of any committee established by them.

(2) Arrangements under subsection (1) may, in particular:

(a)make provision for a quorum at meetings;

(b)provide that a function of the Commissioners:

(i)may be exercised by two Commissioners, or

(ii)may be exercised by a specified number of Commissioners (greater than two).

(3) A decision to make arrangements under subsection (1) must be taken with the agreement of more than half of the Commissioners holding office at the time.

(Section 35 of the Act referred to above makes provision for the functions of the Revenue and Customs Prosecution Office.)

Prepared 19th December 2011