CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1531-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

HM REVENUE AND CUSTOMS ACCOUNTS 2010-11

MONDAY 7 NOVEMBER 2011

ANTHONY INGLESE CB

DAVE HARTNETT CB and SIR GUS O'DONNELL

Evidence heard in Public

Questions 230 - 555

USE OF THE TRANSCRIPT

1.	This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Monday 7 November 2011

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Meg Hillier

Fiona Mactaggart

Austin Mitchell

Ian Swales

James Wharton

Paula Diggle, Treasury Officer of Accounts, Paul Keane, Director, National Audit Office, and Amyas Morse, Comptroller and Auditor General, gave evidence. Gabrielle Cohen, Assistant Auditor General, NAO, was in attendance.

report by the comptroller and auditor general

HM Revenue and Customs 2010-11 Accounts

Examination of Witness

Witness: Anthony Inglese, General Counsel and Solicitor, HMRC.

Q230 Chair: Welcome. I gather this is your first appearance before a Select Committee, so I hope you do not find it too onerous. I hope that we won’t take up too much of your time, but it depends on how the questioning proceeds. May I refer you first to the note of the meeting of 8 December 2010 in your offices? Can you tell the Committee whether those minutes are correct?

Anthony Inglese: May I say at the beginning, Chair, on that note that I cannot comment on the contents of the document? It was prepared as an aide-mémoire by two-

Q231 Chair: Why can’t you comment?

Anthony Inglese: For various reasons. I think the Committee understands the constraint I am under. It’s a note that-

Q232 Chair: No, we don’t quite.

Anthony Inglese: It is a note that is legally privileged and it also-

Q233 Chair: Why is it legally privileged?

Anthony Inglese: Because it was part of the evidence gathering that, as a lawyer, I was doing in order-

Q234 Chair: For whom?

Anthony Inglese: In order to advise the department.

Q235 Chair: May I just make it clear to you that you are also a civil servant, are you not?

Anthony Inglese: Yes, I am.

Q236 Chair: As a civil servant, to whom you are accountable?

Anthony Inglese: I am accountable to my department.

Q237 Chair: No, you’re not. You’re accountable to Parliament.

Anthony Inglese: But I do believe the Committee understands the constraint I’m under-

Q238 Chair: No, we don’t, actually. We think that you, as a civil servant, are accountable to Parliament. If there are issues in the public interest, it is beholden on you to answer them. That is the first thing to say. These issues are all in the public domain, anyway. Rather than evading the questions, which will end with you being here for rather longer than we had hoped, it would help if you could actually answer them.

Anthony Inglese: I would very much like to try to help the Committee, Madam Chair, but there are some constraints that I am under. May I tell you how I can help the Committee?

Q239 Chair: You have explained that you have given advice to another officer of the Crown, who is also accountable to Parliament-namely, the department or Mr Hartnett or whoever-so we consider that both of you are civil servants, both of you are accountable to Parliament, and both of you should give us an account of yourselves and the content as well as the process. I do not see how you can quarrel with that interpretation.

Anthony Inglese: Can I begin by talking about the process?

Q240 Chair: No, you can begin by answering the questions. You have said that you feel you cannot answer all the questions. You said one of your constraints was that you gave advice to the department. You agreed you are a civil servant; you are therefore accountable to Parliament. Any other constraints, Mr Inglese?

Anthony Inglese: I would like to be able to say something, and I can go on to say something more helpful, but the constraints that I am under, as well as legal privilege-

Q241 Chair: I do not understand the legal privilege point. I have just said to you that the legal privilege point is not a point, because you are civil servants, and you were giving advice to a civil servant who is accountable to Parliament.

Anthony Inglese: There are conventions in Parliament about what can be answered on legal privilege-Ministers, for example. There are various ramifications of the legal privilege point. At the moment, there is a judicial review being brought against HMRC.

Q242 Mr Bacon: Oh, really? Can you give us the case number, please?

Anthony Inglese: We have had the pre-action protocol letter by a pressure group and we are now looking at our response.

Q243 Mr Bacon: Are there any proceedings?

Anthony Inglese: Proceedings are imminent.

Q244 Mr Bacon: What is the answer to my question?

Anthony Inglese: The way judicial review works-

Q245 Mr Bacon: What is the answer to my question, Mr Inglese? Are there any proceedings?

Anthony Inglese: For the purposes of the sub judice rule, we have had a letter before action-

Q246 Mr Bacon: Yes, I understand that you have had a letter before action. Once again, what is the answer to my question: are there any proceedings before the courts?

Anthony Inglese: Proceedings are imminent.

Q247 Mr Bacon: Are there any proceedings before the courts now? Yes or no?

Anthony Inglese: At this moment, no.

Q248 Chair: Can I draw your attention to Erskine May? I want to draw your attention to two things before we get on to the matter in relation to proceedings. Erskine May explains that when matters are considered sub judice: "Civil proceedings are active when arrangements for the hearing, such as the setting down for a case for trial, have been made, until the proceedings are ended by judgment or discontinuance." In your answer to Mr Bacon’s questions, there are no proceedings, so this is not sub judice. Erskine May then goes further: "where a ministerial decision is in question,"-indeed, this is not a ministerial decision; it is an official decision-"or in the opinion of the Chair"-that is me-"a case concerns issues of national importance…reference to the issues or the case may be made in motions, debates or questions." So under Erskine May, I put it to you, Mr Inglese, that you ought to be answering our questions fully.

Anthony Inglese: Chair, with the greatest of respect, I cannot answer those questions. I am under the constraints of legal professional privilege, which is a privilege that I owe to my clients.

Q249 Chair: Are you saying that you as a civil servant override Erskine May? You are a civil servant, Mr Inglese. You are here as a civil servant.

Anthony Inglese: My understanding of the rules is that they apply where proceedings-the type of case that a judicial review is involved in-involve a protocol before action, but that protocol still has effect.

Q250 Chair: There is no action. We have established that. Mr Inglese, can I read to you again the Erskine May reference? We have established there are no civil proceedings, but "where a…decision is in question"-that is what we are dealing with this afternoon-"or in the opinion of the Chair a case concerns issues of national importance"-I think this does, because many, many millions of taxpayers’ money are involved-in those cases, "reference to the issues or the case may be made in motions, debates or questions." I put it to you that, as a civil servant answerable to the Crown, you have to abide by the rules of Erskine May.

Anthony Inglese: I am accountable in this respect to my department and to Treasury Ministers.

Q251 Chair: Actually, I do not think you are very accountable to Treasury Ministers, but you are accountable to Parliament, if I may say so. We see a lot of officials in front of this Committee. In fact, we do not even bother with Ministers; we just see officials, and they-you-are accountable to Parliament.

Anthony Inglese: If I may say, I have prepared as much as I can for this session. There are some things which I-

Q252 Chair: No, you have to answer the questions, Mr Inglese. This is not a Committee that takes statements. We want answers to questions-just directly, simply. I think it is beholden on you to answer our questions directly and fully, under Erskine May and as a civil servant.

Anthony Inglese: I do not have a statement, but I think it would be helpful if the Committee could understand the-

Q253 Chair: No. I put it to you that you should be accepting Erskine May. Let me just me ask you another question. James Eadie, who I understand is the first Treasury counsel, advised-advice that was considered at HMRC in 2009-that "as PAC are a parliamentary body with an oversight role over HMRC it follows that HMRC’s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure". Do you agree with that statement? Do you agree with what Mr James Eadie said?

Anthony Inglese: The legal advice is contained-

Q254 Chair: Do you agree with what Mr James Eadie said?

Anthony Inglese: You have to see the legal advice in context, and the legal advice is-

Q255 Chair: Do you agree with what he said? Shall I quote it to you again: "as PAC are a parliamentary body with an oversight role over HMRC it follows that HMRC’s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure"? Was Mr Eadie right or not right?

Anthony Inglese: The current legal advice that we have in HMRC-

Q256 Chair: Was he right or not right, Mr Inglese? It is a very simple question.

Anthony Inglese: We have taken the unusual step of writing-Mr Hartnett has written to you on 19 October.

Q257 Chair: Mr Inglese, was Mr Eadie right? Do you agree with Mr Eadie? He is first Treasury counsel. Do you agree with James Eadie’s view or not?

Anthony Inglese: Mr Hartnett has written to you on 19 October-

Q258 Chair: Mr Inglese, do you agree with him or not?

Anthony Inglese: And Mr Eadie has agreed with that letter.

Q259 Chair: Do you agree with Mr Eadie’s advice? Do you agree?

Anthony Inglese: All the advice on this subject has to be seen in its full context.

Q260 Chair: Do you agree? I will quote it again. This is nothing to do with context or anything. He said, "as PAC are a parliamentary body"-that is what we are-"with an oversight role over HMRC"-you, as a civil servant, in the HMRC-"it follows that HMRC’s functions would extend to assist PAC with that oversight role. So there is no absolute bar on disclosure". Do you agree with that? It is a very simple question.

Anthony Inglese: What Mr Eadie has said is that HMRC-this is in the letter of 19 October-

Q261 Chair: I picked out that bit of advice, because it is the key bit of advice that you got from Mr Eadie that will influence the content of this hearing, and it would just make our life one heck of a lot simpler if you could decide whether or not you agreed with it.

Anthony Inglese: The letter-

Q262 Chair: Do you agree with it, Mr Inglese? Why are you finding it difficult to answer the question?

Anthony Inglese: Because what you have done is refer to a part of an opinion that was written in 2009, whereas-

Q263 Chair: It is a pretty basic part. It is a key element in the status of you and your department in relation to us and our Committee. It is a key bit, which is why I have picked it out. It is the key element. Do you agree?

Anthony Inglese: This is an opinion of 2009. There is an up to date piece of advice, which the department has communicated.

Q264 Chair: So was Mr Eadie wrong in 2009?

Anthony Inglese: The department has communicated-

Q265 Chair: Was he right or wrong?

Anthony Inglese: I do not think it helps to go in that direction.

Q266 Chair: Why?

Anthony Inglese: Because the up to date advice is in the letter of 19 October-

Q267 Chair: Has he changed his view since 2009?

Anthony Inglese: The 19 October-

Q268 Chair: Please, it will make it a very much simpler hearing if you will just answer the questions. Maybe the notes will help you to give us a yes or no. These are very, very simple and quick questions. Both the reference to our proceedings within Parliament and the reference to the advice from Treasury counsel will then give us a context in which we can get clarity in the questions you ask us. That is all. Just give me a yes or no.

Anthony Inglese: Well the answer is that the words you have used are a partial quotation that you cannot draw a wider conclusion from.

Q269 Chair: No. What it says is that you have a duty to Parliament. Do you? Do you have a duty to Parliament?

Anthony Inglese: The letter of 19 October says-

Q270 Chair: These are such simple questions. Do you have a duty to Parliament? Let me draw it down. Do you consider that you have a duty to Parliament? Yes or no. Is that easier to answer?

Anthony Inglese: Yes.

Q271 Chair: You do. Okay. Is there an absolute bar on giving evidence to us about individual cases where they have national importance? Is there an absolute bar?

Anthony Inglese: That is what the letter of 19 October says. HMRC has consistently taken the view that it is lawful to pass non-identifying information to Select Committees through the gateway that we have. However, it does not follow from this that it is necessarily properly part of HMRC’s functions to provide disclosure of taxpayer-specific information to a Select Committee.

Q272 Chair: Are you now saying that, as I take it, James Eadie was wrong? I just want that for the record.

Anthony Inglese: No. I am saying that you have taken the James Eadie sentence out of context.

Q273 Chair: I have not taken it out of context. I have taken it as the key way in which he wanted to distinguish-I do want to get on to the content, because we want to answer questions on the actual content of this case. If you are going to evade them, I think you will end up with an exceedingly cross Select Committee, but let us see.

Q274 Stephen Barclay: If I am hearing correctly, Mr Inglese, you have accepted two points-that HMRC owes a duty to Parliament and to the Public Accounts Committee. Is that correct?

Anthony Inglese: I have said-

Stephen Barclay: You have just said it.

Anthony Inglese: I have said that it is part of our functions properly to assist Parliament, and we have taken a view that it is lawful to pass-

Q275 Stephen Barclay: Please stick to the question. It even says on page 5 of the 19 October letter-so this is not a trick question-that "HMRC recognises that it is part of its functions properly to assist Parliament", so can we just please stick to the questions? I thought that you had already accepted this point. Can we just go again? Do you accept that HMRC owes a duty to assist Parliament and the Public Accounts Committee? Yes or no?

Anthony Inglese: Yes.

Q276 Stephen Barclay: Good. Do you therefore accept that information can be provided that is non-identifying?

Anthony Inglese: Yes.

Q277 Stephen Barclay: I thought that those were the two points that we had got to with the Chair. Where does the legislation draw a distinction between identifying and non-identifying information?

Anthony Inglese: Because the legislation looks at each disclosure-

Q278 Stephen Barclay: But can you refer to the legislation? Where in the legislation is a distinction drawn between identifying and non-identifying? Can you tell me which section that is?

Anthony Inglese: That is the context of the legislation, so if you look in sections 18 and 19-

Q279 Stephen Barclay: No, it is not. There is no distinction.

Anthony Inglese: That is the advice that we believe is right, and that we have confirmed with the first Treasury counsel. That is our legal advice, and it is the advice that we act on.

Q280 Stephen Barclay: Can I come back to the question? There is no distinction drawn. Can you take me to the section that draws a distinction between identifying and non-identifying information?

Anthony Inglese: It stems from the notion of what one is disclosing, so one has to look at each disclosure; that is the point of the 2011 letter.

Q281 Stephen Barclay: No, the 2011 letter lists five policy reasons, Mr Inglese, which I will come to, and which we can go through. Chief among them is that of it having an effect on voluntary compliance, but the Act, on my reading, does not draw a distinction between identifying and non-identifying information. The department is calling for five policy reasons, which we can come on to, but in law there is no distinction, is there?

Anthony Inglese: In law, one has to look at the specific piece of information that is being disclosed.

Q282 Stephen Barclay: There is no statutory justification for the distinction, is there? There are perfectly reasonable policy reasons why you may want to take a decision not to disclose, and we can come on to those. The letter from Mr Hartnett sets out five policy reasons, but there is no statutory justification for distinguishing between identifying and non-identifying, is there?

Anthony Inglese: The sentence that I read out is the sentence that says that we look at each specific piece of information when it is being disclosed.

Q283 Stephen Barclay: I am asking for the law. Can you take me to where in statute it defines a distinction between the two?

Anthony Inglese: The best answer that I can give, I think, is that one has to read the whole of this letter to get the context right.

Q284 Stephen Barclay: With respect, the letter is not the law. The letter sets out a range of factors that are policy considerations. What I am asking you is where in statute it says that. What we have here is a door; the door says that where there is a gateway, which is if you have a duty to assist Parliament, you can provide information. In the case of this Committee, the gateway is open. In statute, there is no distinction between those two things. Referring to the letter is a totally different issue to what is in statute. Do you accept that in statute no distinction is drawn? As I understand it, you are general counsel for HMRC.

Anthony Inglese: Yes, I am general counsel.

Q285 Stephen Barclay: As general counsel of the department, do you accept that in statute there is no distinction between identifying and non-identifying information? Yes or no?

Anthony Inglese: Looking at the context of the legislation, there is a distinction.

Q286 Stephen Barclay: Can you take me to the distinction?

Anthony Inglese: I can take you to it, if you would like, by looking at the letter.

Chair: No, the letter is no good.

Q287 Mr Bacon: It is the Act that we are after.

Anthony Inglese: If I can pick out the highlights of the letter-

Chair: We are not interested in the letter; we are looking at the Act.

Q288 Mr Bacon: It would be quicker if you went to the Act. That is the actual legislation.

Anthony Inglese: In order to read the legislation-sections 18 and 19-one has to look at the legislation as a whole, and then one takes one’s meaning from the words used in the legislation and the purpose and the context. That is how legislation is interpreted.

Q289 Stephen Barclay: There is nowhere in law where it distinguishes between those two things, is there? It is policy consideration, and we can come on to that, but in statute you are not prevented from disclosing.

Anthony Inglese: No, it is more than policy.

Q290 Stephen Barclay: Where? You are a lawyer.

Anthony Inglese: If you have the patience, I must refer you to parts of the letter, which are very clear.

Q291 Chair: Honestly, Mr Inglese, with the greatest respect, the letter reflects the current policy of HMRC, with which we as a Committee have a problem. You are trying to hide a policy behind an imperative of legislation. If you can demonstrate to us that the imperative of legislation is genuine, you may find a different response from the Committee. It is no good going back to the letter, because the letter is your policy. What my members are drawing to your attention is the legislation. Again, it is a simple question. You seem to find it really difficult to answer these simple questions. Is there something in the legislation that tells you that you cannot reveal details of a particular taxpayer, or is it policy?

Anthony Inglese: It is more than policy; it is what the legislation means. There are two levels to this. The first level is whether the legislation allows us to pass over indentifying information-whether we are permitted to do that. To get there, one has to look at the duty of confidentiality under section 18 and the criminal offence under section 19. I am sorry if the letter acts as a red rag to a bull, but that is-

Q292 Chair: This is the third question you have failed to answer. Just to make it clear: you failed to come back on "Erskine May"; you have failed to answer whether or not you agree with what seemed to me to be at the heart of the advice that you got from James Eadie as first Treasury counsel; and you are now failing to answer whether there is a constraint on you in legislation. You must recognise, as a lawyer, that that is a pretty poor show so far, and we are only 20 or 25 minutes in. We are happy to stay all night.

Anthony Inglese: I am sorry if that is the impression that I am giving. I thought we were just about to start an interesting discussion between two lawyers about what a statute meant, and I can carry on with that.

Q293 Mr Bacon: I think we should pursue that point. I do not understand what you are saying, Mr Inglese. It is fairly clear to me, reading the legislation, that there are lots of circumstances in which disclosure is possible. That is plain on the face of the Act. Basically, section 18, which you have referred to a couple of times, says in subsection (1): "Revenue and Customs officials may not disclose information which is held by the Revenue and Customs in connection with a function of the Revenue and Customs." Subsection (2) then states: "But subsection (1) does not apply to a disclosure", and it lists paragraphs (a), (b), (c), (d), (e), (f), (g) and (h) as exemptions to the rule that information may not be disclosed. So there are lots and lots of cases just under section 18 in which one can disclose information.

The Act goes on to say in section 20 that "Disclosure is in accordance" with section 20 "if"-and it then gives a whole load of possible examples, one of which is disclosure "to a person exercising public functions". Lots of things are plain on the face of the Act, with regard to why disclosure may, in certain circumstances, be allowable.

Mr Barclay has been pursuing you for seven or eight minutes, perhaps longer, on the simple question of where the statute draws a distinction between-I think you said, Mr Barclay-identifying and non-identifying, and you have failed to answer him. You have answered a different question, which he did not ask, which leads me to believe, although I am not certain of this, that the correct answer to Mr Barclay’s question is that there is nowhere in the statute that draws a distinction between identifying and non-identifying. Is it correct that nowhere is a distinction drawn? I do not know why you are getting all these notes from people behind you; you are supposed to be the general counsel for HMRC. You are the top dog in the legal area; in so far as one has legal dogs, you are the top one, so why you have these people woofing behind you I am not clear. You are the one who should be advising them, frankly. Is what Mr Barclay was pursuing correct? Is there no statutory definition that distinguishes between non-identifying and identifying? Is that correct?

Anthony Inglese: This legislation, as with all legislation, takes its meaning from the purpose and the context. Words such as "disclosure" and "functions" take their meaning from the context, and part of the context is the criminal offence under section 19. The letter-

Q294 Stephen Barclay: Parliamentary privilege applies, the Bill of Rights would apply, in terms of criminal offence, but in any event-we have not gone into the detail with Vodafone-that is information in the public domain. That gets us into the issue of policy decision. Even the letter from Mr Hartnett accepts the fact. He says, "Where there is a power to disclose", which is obviously different from the position taken by Sir Gus O’Donnell letter to Edward Leigh, in which he said that we cannot disclose, much as we would like to do so. Mr Hartnett is saying, "Where there is a power to disclose, a decision whether or not to disclose must be taken in respect of each identifiable piece of information". So there is an acceptance in this letter which, indeed, talks about the need "to reach (in summary) a reasonable decision." The point is that in law you’re not prevented from disclosing, but the department is taking a decision, which it is perfectly entitled to take, at its own discretion as to whether it discloses. We then need to establish whether that decision is being exercised reasonably or not. The point is that you are not prevented in law from disclosing.

Anthony Inglese: As I was saying earlier, there are two levels. First, is it part of our function to disclose identifying information? The letter says that it does not follow that it is properly part of our function, and the question about whether it would be the case is far from free of doubt. Because of the potentially criminal context in which the question arises, it is entirely appropriate for the Commissioners to take the view that they do not want to have that doubt.

Q295 Stephen Barclay: You are saying that criminal sanctions apply. We are talking about passing information to Parliament, so parliamentary privilege would apply.

Anthony Inglese: It is also necessary to look at the other provisions of the Act that, for example-

Q296 Stephen Barclay: You have gone off on to another point. Your point was that criminal sanctions apply. Surely this would be covered by privilege.

Anthony Inglese: No, it is important to look at the other provisions because, for example, we comply fully with the NAO and expose all our papers to it. The NAO has constraints on it, but powers to disclose.

Q297 Stephen Barclay: Again, that is an entirely different issue. You have no choice over that; the NAO has the right to demand whatever information it needs. We covered that last time and it is absolutely irrelevant as to how you exercise your discretion. You have no discretion in terms of the NAO. The NAO, by law, can ask for whatever information it requires.

Anthony Inglese: I haven’t commented on the second level yet. At the first level, it is entirely proper for the Commissioners to take the view that this isn’t a function because of the advice-

Q298 Chair: What isn’t a function?

Anthony Inglese: That it is not a function to give identifying information. As the letter says, it is far from free-

Q299 Chair: Ever?

Anthony Inglese: I think that one would have to find a highly exceptional case-

Q300 Chair: Well, in the minutes that we are going to come back to in a minute, you said that particulars of the claim in the county court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. Is that true?

Anthony Inglese: I don’t-

Chair: Is that true?

Anthony Inglese: I am not going to comment on the contents of that document.

Q301 Chair: Is that true, Mr Inglese? Is it a fact or not a fact? You are not asked for a comment. Is that true? I will read it again. You are said to have said that the particulars of claim in the county court were public documents and could be copied by anyone interested in comparing the settlement sum with the claim. Is that true? Are there public documents in the county court that could be copied by anyone interested in comparing the settlement sum with the claim? Is that true?

Anthony Inglese: I’m afraid I cannot comment on the content.

Q302 Chair: Why can’t you? It is completely ridiculous. This is just an issue of fact. Can you say whether that is true or not true?

Anthony Inglese: I can say at a general level that if there is litigation in the county court, the documents will be available.

Q303 Stephen Barclay: It is here. I’ve got a comment on the Goldman Sachs case. It is interesting-we may come on to why you issue proceedings in the county court, which tends to get less reported than the High Court, given the value of the sum. The documents are here; they are a matter of public record, as are the data in the Vodafone accounts that show the amounts of assets it has. It is a policy issue about where you are, and there are various policy points concerning the impact on voluntary compliance or the issue about the prosecution of officials. Those are policy questions. I am very happy to spell out why I don’t think they apply, but we have not addressed the starting point, which is the legal decision.

Anthony Inglese: If I come on to that level, an issue set out in the letter says that if it were the case that a function existed, that power would still have to be made in a way that was consistent with both public law principles and the department’s statutory obligations.

Q304 Chair: Right, Mr Inglese, we are taking a very unusual step this afternoon. From here onwards, we are going to examine you on Oath-that is a power that we have. The Oath will be administered by the Clerk. I gather there are two forms of words that you can give, which the Clerk will read out to you.

Anthony Inglese: Can I have a minute’s time out?

Q305 Mr Bacon: No, I don’t see why you should have a minute’s time out at all. This Committee has the power to make witnesses give evidence under Oath, and we are doing so because we have not been able to get answers otherwise, so I think we should just get on with it.

Anthony Inglese: I swear by almighty God that the evidence I shall give before this Committee shall be the truth, the whole truth and nothing but the truth, so help me God.

Q306 Chair: Thank you. I am no lawyer, but clearly, as you have taken the Oath, you will not want to give answers that are incorrect, because you might find yourself with an accusation of having committed perjury, as I understand it.

May we now return to the minutes of the meeting on the 8 December 2010 in your office, and can you confirm whether they are correct?

Anthony Inglese: I cannot comment on the contents of the document, but it was prepared as an aide-mémoire by two of my litigating lawyers after a meeting that I held. The note was not cleared with me. You have heard my general reasons for not commenting on the note itself, but if it helps the Committee, I will tell you why I had the meeting and what I was trying to achieve, so that you can understand the context.

Q307 Chair: There are a number of bits that really interest the Committee, but we will look at the final sentence of that minute, which says, "AI"-you-"said he would always want to assist DH,"-Mr Hartnett-"but not if this were ‘unconscionable’. He"-you-"referred to the difficulty all those present at this meeting were having in justifying a settlement without an interest element". Is that correct? Did you consider the settlement in that light? Was that a correct reflection of your view of the settlement?

Anthony Inglese: At that meeting, I was trying to understand what had happened. Mr Hartnett asked me for advice. He said, "A mistake has been made, will you advise me on what-"

Q308 Chair: He did not tell you then that a mistake had been made; as I understand the chronology, it was after you had the meeting. Did you, at that time, in that meeting, consider-even taking out the "unconscionable"-the difficultly all those present at the meeting were having in justifying a settlement without an interest element? Is that correct? Was that your view?

Anthony Inglese: Having sworn the Oath, I do need time to tell you the context, which is that I was trying to understand what had happened. I did not know anything about the-

Q309 Chair: You are trying to evade the question again, Mr Inglese. It is quite simple: was that your view or not? It is a very simple question. Giving me context is a way-which I hate in this Committee-of evading an answer.

Anthony Inglese: I am not evading the answer, but you do not often get advisory lawyers coming to talk to you, and it is important that I have an opportunity to explain what I was trying to do at that meeting. I was trying to gather information about what had happened. We talked around what the case involved, because, by reaching a settlement in that case, effectively, a piece of litigation that we had on the go was being de facto settled. So I had to speak to my litigation lawyers, who were handling the litigation, to ask, "What’s it all about? What’s going on? What do you know? What are the issues?", so that I could try to understand what the mistake was.

Q310 Chair: You keep referring to a mistake. At that point, nobody admitted to a mistake. At that point, did you think that the settlement was unconscionable?

Anthony Inglese: No, I don’t even believe that I used the word "unconscionable."

Chair: It’s actually in quotation marks.

Anthony Inglese: I know, but I don’t believe-

Q311 Chair: Was it difficult for those present to justify a settlement without an interest element?

Anthony Inglese: I think that the juxtaposition of those things in that paragraph produces an unfortunate interpretation that I believe is not the case.

Q312 Chair: You have a wonderful memory of everything except for using the word "unconscionable." Is that right?

Anthony Inglese: No, what I believe that that sentence is getting at is that one of the things at which we looked at the meeting was to see whether a mistake had actually been made. Sometimes, people say they have made a mistake, but then, when you think it through, you find that, actually, they had it right all along. We talked it round, looked at what was going on, and concluded that, as far as we were concerned, we believed that a mistake had been made.

Q313 Chair: What did you advise Mr Hartnett? Did you advise him that the settlement reached was binding or not binding?

Anthony Inglese: As Mr Hartnett has explained to this Committee, I advised him on what the options were.

Q314 Chair: Did you advise him that it was binding? You are being so evasive. Was it a binding agreement or not a binding agreement?

Anthony Inglese: I am not being evasive.

Ian Swales: Mr Hartnett has already asserted the point.

Anthony Inglese: If I may say so, Chair, you have put the question in a binary way. I advised that it was open to the department to go back and revisit the settlement, or that it was open to the department to carry on and accept the mistake.

Q315 Ian Swales: Does that mean non-binding, to a non-lawyer like me? That sounds like what you are saying.

Anthony Inglese: No, that is not a word I am using.

Q316 Mr Bacon: It was a word that Mr Hartnett used-that is the point. He said that the legal advice-one takes it that he was referring to the advice from the general counsel’s office and from you-was that the agreement could be unwound, or that you could choose to be bound by it. Mr Barclay said at the time, in question 37, "you accept that legally you were not bound by that decision. Legally you could have rectified it." Mr Hartnett replied, "I received advice that we could regard ourselves as bound by it, or not bound by it." Does that refer to your legal advice?

Anthony Inglese: It was my personal advice.

Q317 Mr Bacon: Let me clarify that that sentence that I just read out was your advice.

Anthony Inglese: My personal advice was that they could bring back and reopen the settlement, or we could go on and leave things as they were. Those were the two options.

Q318 Mr Bacon: Indeed-you could let the thing lie. The words that Mr Hartnett chose to use were, "I received advice that we could regard ourselves as bound by it, or not bound by it." Mr Barclay said, "In other words, you were not bound by it." Is it not correct to say, following what Mr Swales asked a moment ago, that your advice was that HMRC was not bound to stick to the agreement? That is correct, isn’t it?

Anthony Inglese: I have said previously that this is the subject of a judicial review that will put the spotlight-

Q319 Mr Bacon: First, we have established that there are no proceedings-we established that earlier. I am just asking you about Mr Hartnett’s evidence last time, and you have already agreed that you were one of the people who gave this advice. When we see Mr Hartnett saying, "I received advice that we could regard ourselves as bound by it, or not bound by it", was Mr Barclay correct when he responded, "In other words, you were not bound by it"? In other words, my question is whether it is correct to say that the advice was that the agreement was not binding-yes or no?

Anthony Inglese: And my advice was that we could go back and reopen.

Q320 Chair: Your advice was to go back and reopen the negotiations.

Anthony Inglese: Or that we could-

Q321 Mr Bacon: Good, that’s clear-your advice was that you could reopen it. Once again, we can, I hope, get to the question that I asked. Was it correct to say that your advice was that the agreement was not binding-yes or no? I do not know why you have this reluctance to answer a question when the answer seems obvious to everyone else.

Anthony Inglese: I am doing my absolute best, within my constraints of legal privilege, to give you the headline of my advice. The headline was that we could go back and reopen.

Q322 Mr Bacon: Thank you.

Anthony Inglese: Or-and I have to say verum-and not.

Q323 Fiona Mactaggart: I’m interested in this. I wasn’t at the earlier sessions, but this sounds to me as though this advice was given by you after Mr Hartnett thought he had concluded a deal, but you said earlier that this was part of your litigation strategy. Would it not have been normal for him to have asked you for advice before he went out to agree a deal, and if he did not, why not?

Anthony Inglese: The answer to the very first question about the litigation and settlement strategy is that this was a mistake-

Q324 Fiona Mactaggart: What was a mistake?

Anthony Inglese: I was giving advice on the basis that a settlement had been made, and a settlement under the litigation and settlement strategy is a good thing if settled appropriately. If a mistake is made, the advice that I was giving was on the mistake, so the answer to the second part related to whether, because there was litigation going on, the team should have consulted the litigating lawyers. The answer to that question is yes, the team should have done.

Q325 Fiona Mactaggart: And did they?

Anthony Inglese: They did not.

Q326 Chair: Can I get it clear? When you thought it was a mistake, the litigation strategy was not properly followed in this particular instance.

Anthony Inglese: That is because it was a mistake.

Q327 Chair: It doesn’t matter why. I accept that you say it was a mistake, but the litigation strategy as set out in HMRC was not properly followed in this instance.

Anthony Inglese: I am sure the team was doing its absolute best in good faith to follow the strategy, but it made a mistake.

Q328 Chair: Can I ask you a question? If you give clear advice, and it’s not heeded, who do you go to?

Anthony Inglese: The first port of call, if it’s not heeded, is that I would go to the person I gave it to.

Q329 Chair: Yes, of course. They’re the ones who don’t heed it. Go on.

Anthony Inglese: I’m sorry. I probably don’t need to say this to you, Madam Chair, with your experience of Ministers and so on, but you go to the person you have advised, and say, "Is something not clear about the advice? What are you doing with it?" I’m not drawing myself up to my full height, but in my very long experience of working in many Government Departments that usually does the trick, because we are working under a rule-of-law culture and people want in their hearts to follow the rule of law, even if sometimes it irritates them immensely, and they want to question the legal advice. Sometimes the legal advice needs to be questioned, so you go back to the person and you say, "Is the advice not clear? Has it not hit the target? Is there something you don’t like about it? What should we do about it?" You sit down and you talk it through with people. That usually does the trick.

Q330 Chair: And then? If it doesn’t do the trick, who do you go to? In this instance, your advice was you have permission for overturning the deal on which there was a handshake. In this instance, they didn’t listen to your advice that they could return to it. Who would you go to beyond Mr Hartnett?

Anthony Inglese: My advice was listened to in this case. I said, "You can go back, or you cannot go back." So my advice was listened to.

Q331 Chair: I see, so you cover yourself by not giving clear advice. You can do, yes or no, and everything’s all right. That’s not very strong advice.

Q332 Fiona Mactaggart: How does that comply with the litigation and settlement strategy, which in strong cases-and in view of the fact that the other cases, which were on all fours with this one, did concede-says, "Settle for the full amount HMRC believes the tribunal and courts would determine or otherwise litigate." How does it comply with that?

Anthony Inglese: In this particular case, the aim was to settle the case appropriately and a mistake was made. It was a mistake.

Amyas Morse: I think you sort of slipped on a point there. I think I heard you say that normally the advice would be taken before a settlement was made and the advice was not taken before the settlement was made. You then gave advice about mitigating the mistake that resulted from the settlement being made. Is that right?

Anthony Inglese: Yes.

Q333 Stephen Barclay: On the chronology, can we clarify what date you became aware that a mistake had been made?

Anthony Inglese: 7 December.

Q334 Stephen Barclay: So when Mr Hartnett shook or did not shake hands with Goldmans two days afterwards-sorry, it was three days, because it was the weekend: he had the meeting on the Friday and he said he spotted the mistake on a Monday-he did not get in touch with you at that point?

Anthony Inglese: I believe he got in touch with me as soon as he was able to. I do not think anything turns on that.

Q335 Stephen Barclay: The chronology is interesting, because I have always found it odd whether the mistake was spotted before or after the meeting on 30 November. Can we go through the chronology? The meeting was held on 19 November-actually, why don’t you take us through the chronology? The meeting with Goldman Sachs and Mr Hartnett was on what date?

Anthony Inglese: I believe it was 19 November.

Q336 Stephen Barclay: So the deal was done on 19 November, yet you did not learn of the mistake until 7 December, yet you are the chief lawyer advising on whether this is a binding or non-binding deal. Can you talk us through what happened after 19 November? Who first brought it to your attention? When did you first learn of a mistake having been made?

Anthony Inglese: 7 December.

Q337 Stephen Barclay: Okay. Who brought that to you? Was it Mr Hartnett or one of your lawyers?

Anthony Inglese: Mr Hartnett.

Stephen Barclay: So-

Q338 Mr Bacon: So-thank you, Mr Barclay, this is totally relevant-when Mr Hartnett said in answer to question 33, which asked when he spoke to Mr Inglese, he said: "I think on the Monday"-that is, Monday the 22nd, after Friday the 19th-that was wrong, wasn’t it?

Anthony Inglese: There was a point between-I cannot remember the dates at that point-the settlement and 7 December where Mr Hartnett spoke to me.

Q339 Mr Bacon: Yes, but we are talking about Monday the 22nd. The meeting occurred on Friday the 19th. Mr Hartnett said, in response to my question asking him when he spoke to Mr Inglese: "I think on the Monday, but I need to check, Mr Bacon. I’m sorry." I asked him: "You think it was the 22nd, after the Friday." He said: "Very soon after, yes." Well, actually, we are talking about a couple of weeks, some 15 days after. If you did not find out until 7 December, that is a couple of weeks. I know that Mr Hartnett was travelling-we established that he was abroad most of that week-but there are telephones. You are telling us that you did not find out until 7 December.

Anthony Inglese: I did not find out until 7 December.

Q340 Mr Bacon: That makes sense, because you immediately convened a meeting, which took place on 8 December. That is right, is it not?

Anthony Inglese: On 7 December, I started to gather information. I convened meetings on 7 and 8 December. There is one other thing. I heard about the case from Mr Hartnett before 7 December. In that conversation he said to me: "One of the cases that you are litigating has just settled." At the time, I did not think any more of it.

Q341 Stephen Barclay: Did he tell you what case it was?

Anthony Inglese: He might have done, but-I am not trying to be funny-we have 8,000 cases, and if I do not need to know, I do not ask.

Q342 Stephen Barclay: Can you clarify whether, ahead of today’s hearing, you read the minutes of the 30 November meeting?

Anthony Inglese: Which meeting was that?

Q343 Stephen Barclay: That was the high-risk group meeting that was held on that date.

Anthony Inglese: I think I read them, but I don’t have them in front of me.

Q344 Stephen Barclay: I presume that there is a detailed minute of that meeting.

Anthony Inglese: I cannot recall that. I do not have it in front of me.

Q345 Stephen Barclay: Well, it’s difficult to read it if it doesn’t exist, but one would assume a meeting of that gravity would have minutes taken. Do those meetings usually have minutes taken?

Anthony Inglese: Yes.

Q346 Stephen Barclay: But you haven’t read them prior to coming today?

Anthony Inglese: I have read them, but I don’t have them in front of me now.

Q347 Stephen Barclay: So they do exist. Was any of your team at that meeting?

Anthony Inglese: Yes.

Q348 Stephen Barclay: Did any discussion take place around the Goldman Sachs deal at that meeting?

Anthony Inglese: Yes.

Q349 Stephen Barclay: Was the mistake spotted or discussed at that meeting on 30 November?

Anthony Inglese: I believe so.

Q350 Stephen Barclay: So at the meeting on 30 November, the mistake had been identified then, more than a week before Mr Hartnett telephoned you?

Anthony Inglese: Mr Hartnett spoke to me on 7 December.

Q351 Stephen Barclay: Sure. Did no one from your team communicate that a mistake had been made, on something of this gravity, between 30 November and 7 December?

Anthony Inglese: Did anyone from my team tell me?

Stephen Barclay: Yes.

Anthony Inglese: No.

Q352 Stephen Barclay: So your team-your lawyers-went to a meeting where they established that a serious mistake had been made, but they didn’t tell you, as general counsel?

Anthony Inglese: My lawyers are appropriately senior and they can engage on this sort of thing if necessary. They don’t need to tell me everything.

Q353 Chair: We don’t know the precise sum, but this is £8 million to £10 million of taxpayers’ money gone missing. That’s a lot of money. That’s jolly serious.

Anthony Inglese: At the time, I am assuming from-

Chair: But you consider that serious, don’t you, Mr Inglese?

Anthony Inglese: At the time, people were looking at the mistake and working out what to do-

Q354 Chair: Yes, Mr Inglese, but you agree with the Committee’s view that whatever the sum is, £8 million to £10 million is a lot of money?

Anthony Inglese: Of course it is.

Chair: Right. It is serious. I would have expected someone on my team, had I been their boss, to tell me.

Stephen Barclay: In terms of the discretion given to your team-we have been focusing on Goldmans, whereas the bigger-value item was the Vodafone settlement and the mystery as to how the figure of £1.25 billion was arrived at-did your team provide legal advice on whether £1.25 billion was the correct amount?

Anthony Inglese: Sorry, I missed the first part.

Stephen Barclay: The Vodafone settlement was for £1.25 billion. Did your legal team advise on whether that was the correct amount of tax due?

Anthony Inglese: As Mr Hartnett is saying, lawyers were involved throughout, at different stages of that.

Q355 Stephen Barclay: Sure. I appreciate that lawyers were involved-I would assume that lawyers drew up the contract, so it is a statement of the obvious, to an extent, to say that lawyers were involved. What I am saying is that you alluded to, in terms of your answer to the Goldmans meeting, the fact that you have senior lawyers to whom you give discretion as a result of their expertise. Are you a tax expert yourself?

Anthony Inglese: I am not what you call a tax lawyer.

Q356 Stephen Barclay: And the three lawyers you hired-the three people beneath you-are they tax experts?

Anthony Inglese: The three directors whom I have, who have come to work for HMRC under fair and proper procedures-rather than people whom I’ve hired-are not what you would call tax experts.

Q357 Stephen Barclay: I am sure that it was fair and proper; I wasn’t suggesting otherwise. We discovered at the last hearing that there is only one tax Commissioner who actually has detailed knowledge of tax. What you are saying is that out of general counsel and the three senior lawyers hired, none of them are tax experts.

Coming back to the Vodafone settlement at £1.25 billion, it may be perfectly logical therefore, if you are not a tax expert, for you to give senior lawyers within your area a degree of discretion. What I am trying to establish is whether they advised, with their expertise, that £1.25 billion was the correct amount.

Anthony Inglese: My answer to that is as before: I can confirm that lawyers were involved throughout, but I cannot go into any more detail.

Q358 Stephen Barclay: Okay. I think the quantum is much more important than Goldman Sachs. Between 2001 and 2011, as far as Vodafone is concerned, we are looking at in the region of £25 billion in profits. The settlement-the 30%; obviously, it came down in the latter years-seems strange on a number of levels. First, it includes the 2011 and 2012 profit, but given that the settlement was reached in 2010, I would welcome your thoughts on how they knew what the profit would be for 2011 and 2012, given that those profits had not been realised. Also, the £1.25 billion looks like it has been based on about 20% of Vodafone’s profits. That means the Exchequer may have lost around £8 billion in tax, which makes Goldmans look paltry in comparison.

The reason why I am saying that is that potentially-we cannot get the figures, because Mr Hartnett will not answer the questions-we are looking at £8 billion of tax lost, a company that was given five years to pay even though it was sitting on a cash pile and a settlement based on future profits that were unknown, even though the department does not allow such considerations to be given and the legislation had not been passed by Parliament, so the department could not have given undertakings. I am trying to establish, Mr Inglese-although you and your deputies might not be tax experts-who among your lawyers was advising Mr Hartnett, so that we can satisfy ourselves that the £1.25 billion was correct.

Anthony Inglese: I am afraid I cannot comment on that.

Q359 Stephen Barclay: Why not?

Anthony Inglese: Because that is covered by legal privilege, and I cannot comment. I would like to say something about the fact that you keep mentioning tax expertise. Can I do my job without being a tax lawyer? Of course I can.

Q360 Fiona Mactaggart: Can you do it well without being a tax lawyer?

Anthony Inglese: Yes, I can, because I have lots of tax lawyers who know a lot about the technicalities.

Q361 Stephen Barclay: But we don’t know what involvement they had. That is the issue. We don’t even know if interest was charged on the £1.25 billion. One assumes it was not, because Vodafone released £900 million that they had set aside. They stopped setting money provision aside in 2006, incidentally, probably assuming that they were going to win the case, and then found that they did not. They would have had to set aside far more, had they known they were going to lose the case. But we do not even know what interest the £1.25 billion included. Are you able to tell us?

Anthony Inglese: I cannot comment on any of that.

Q362 Stephen Barclay: But who were the experts from your department that were providing the tax legal advice to Mr Hartnett?

Anthony Inglese: All I can say is that lawyers were involved throughout. That is all I can say.

Q363 Chair: But not in-house lawyers. You sought advice from paid lawyers outside the service-more consultants?

Anthony Inglese: Again, I cannot comment on specific cases, but where necessary-obviously, where there is litigation, we always involve counsel.

Q364 Chair: You said how many cases of litigation?

Anthony Inglese: We have 8,000 cases on the books at the moment. Where there is litigation, obviously, counsel approved by the Attorney-General is always involved. Sometimes, in cases where we want special advice from a silk or a skilled counsel, we bring in external counsel through a solicitor’s office.

Q365 James Wharton: Mr Inglese, I have listened very carefully to the evidence you have just given to Mr Barclay. I apologise, as I am sure this is a matter of my failing to interpret the discussion properly rather than of an evasive answer on your part. Can I take you back a couple of steps to the gap between when your lawyers became aware of the issue and you became aware? Mr Barclay asked you if your lawyers had told you, and you started to explain that the people who work for you are sufficiently senior to make decisions, operate and so on. I may have missed it, but I do not think you actually gave a direct answer, a yes or no, to the question whether they told you or not.

Anthony Inglese: I think I said no.

Q366 James Wharton: Sorry. It is my fault if that is the case. I may have missed that. They did not.

The other question-again, I will keep it very brief-is slightly to the side. One issue that we have looked at, apart from the fact that we often cannot discuss what is in notes and cannot get the information we need as a Committee properly to assess what has gone on, on the basis of documents that we none the less have, can you tell me whether proper records of Mr Hartnett’s meetings with big companies are now being kept, and whether, on your advice, there have been any changes in procedure so that proper and verifiable records are kept in future?

Anthony Inglese: That’s really more of a question for him, but I expect he’ll say yes when you ask him.

Q367 James Wharton: Allow me to rephrase it. Has there been a discussion about the quality of record keeping on which your advice has been sought which may change the procedure, so that when we next ask him, we know what, if any, your involvement has been?

Anthony Inglese: We have had a discussion about whether, in the previous case we were talking about, lawyers should be consulted before a settlement, so that the submission for Mr Hartnett on the settlement would include the views of the litigating lawyers and the record would have-

Q368 James Wharton: And have you had a discussion on the sorts of records that should be kept of Mr Hartnett’s meetings with private companies, with taxpayers-whatever it might be?

Anthony Inglese: No, I have not.

Q369 Austin Mitchell: I have just a couple of factual questions. I’m not a lawyer, although I admire your ability at fencing. It’s better than the Austrian Archduke before the collapse of the empire.

It was agreed in a previous session that Goldman Sachs was warned that if it persisted in resisting, which it did, it would be liable for interest. It resisted for five or six years. Did that warning come from you, or was it just a routine thing passed on as a threatening gesture by HMRC?

Anthony Inglese: That was in the litigation that was being brought.

Q370 Austin Mitchell: Right, but you were consulted in the issue of that warning?

Anthony Inglese: I wasn’t in HMRC at the time. That was 2005.

Q371 Austin Mitchell: Okay, but it would take advice from its legal people in issuing that warning?

Anthony Inglese: Well, it was part of the litigation, so the lawyers and counsel would have been involved.

Q372 Ian Swales: It would be normal practice in any case. Wouldn’t it be normal practice to do that? It wasn’t a one-off decision that Mr Mitchell is referring to. Isn’t it normal practice in litigation of that nature to charge interest?

Anthony Inglese: It depends. If I can come away from that case, it depends on whether it is appropriate and the litigation settlement strategy says that we would normally charge interest where there is a crystallised sum of tax due.

Q373 Austin Mitchell: Okay. We now come to the meeting in December. Mr Hartnett told us in the examination on 12 October that he had consulted you: "There were a number of issues to be taken into account. Mr Inglese said to me that there were two entirely acceptable approaches in law"-we’ve agreed that-"one was to stay with the proposed settlement and one was to put it to one side." You’ve agreed that?

Anthony Inglese: Yes.

Q374 Austin Mitchell: Okay. Was that meeting minuted? Mr Hartnett didn’t know.

Anthony Inglese: The meeting with Mr Hartnett itself was not minuted.

Q375 Austin Mitchell: Okay. Did you express any preference or offer any advice as to which of these two courses should be followed?

Anthony Inglese: I gave the options-what the options were. It was then very much for the Commissioners to decide, on the basis of the relevant facts, which was the preferred option.

Q376 Chair: Lawyers usually give advice as well as options. Did you give advice?

Anthony Inglese: I-

Chair: You are on oath.

Anthony Inglese: I am on oath, and I did not give legal advice.

Q377 Chair: Well, what sort of advice did you give?

Austin Mitchell: What advice did you give?

Mr Bacon: Did you express a preference?

Anthony Inglese: Yes, I did.

Q378 Mr Bacon: Which of the two did you say was the preferable option?

Anthony Inglese: I have no vote in these matters.

Mr Bacon: I understand-

Q379 Austin Mitchell: But your preference was for-

Anthony Inglese: But my preference was for not going back.

Chair: Not going back?

Anthony Inglese: Not going back.

Q380 Mr Bacon: Even though the litigation strategy is clear that in the right kinds of case, it would be normal to charge interest?

Anthony Inglese: Because a mistake had been made and the question then was, having made a mistake-this is not the most uncommon of questions all over Government organisations all the time-we have to find a way of coming up with the best solution that doesn’t make things worse.

Q381 Chair: Is it true, Mr Inglese, that in July 2010 you received advice from Malcolm Gammie that the Government’s position was strong and that you could be confident about getting all the money owed to the taxpayer, including interest?

Anthony Inglese: All I can say is: a mistake was made.

Q382 Chair: Is that true-that you got that advice?

Anthony Inglese: I’m honestly not sure if I can say what advice we got because-

Chair: Well, it’s in the public domain, so you might as well say whether it’s true.

Anthony Inglese: The thing I can say is: we were carrying on with the litigation but then there was a-

Q383 Chair: I assume from that that it is true.

Can you also tell me whether it is true that in April 2010 there was a judgment in the British Virgin Islands in which the judge dismissed a claim that the employer of the bankers-Goldman Sachs-was in the Virgin Islands?

Anthony Inglese: I would have to write to you about that.

Q384 Chair: Why? Because you can’t remember? I can’t believe that in preparing for this hearing this afternoon, which I hear you spent a lot of hours on, you don’t know the answer to that one.

Anthony Inglese: I think I may know the answer, but I just want to make sure that what I can say is right.

Q385 Chair: What do you think the answer is?

Anthony Inglese: What do I think?

Chair: It’s either true or it isn’t.

Q386 Mr Bacon: You’ve just said that you think you know the answer. What do you think?

Anthony Inglese: I would prefer to be allowed to write to you on that one, to make sure that-

Q387 Mr Bacon: We accept that you are not 100% certain, but the question is: what do you think the answer is?

Anthony Inglese: When the question is put like that, I am just not sure. So instead of being po-faced and saying, "I really don’t know", I think I might know but I do need the opportunity to write.

Q388 Mr Bacon: Well, we need the opportunity to get the answers, and you are under oath, Mr Inglese.

Anthony Inglese: I promise I will write very soon, because the answer is out there, but I just-

Q389 Chair: Can I come back to a question I asked you before? Is it true that the particulars of claims in the county court are public documents and could be copied by anyone interested in comparing the settlement sum with the claim?

Anthony Inglese: Is that the same as the question you were asking before?

Chair: I’m asking it now, when you are on oath.

Anthony Inglese: I believe from what I have heard from my litigating lawyers that that is indeed the case, that the public can see them.

Q390 Chair: If that is the case, can you therefore tell us what the claim was and what the settlement sum was?

Anthony Inglese: No, I can’t.

Q391 Chair: Why not? If it’s in the public domain, can’t you tell us?

Anthony Inglese: I can’t tell you what the settlement was.

Q392 Chair: Sorry, but to go back again, you have said it is true that these are public documents that could be copied by anyone interested in comparing the settlement sum with the claim. So if it is true that they are in the public domain, could you help the Committee by telling us what the claim was and what the settlement sum was?

Anthony Inglese: If a figure is in the public domain I can help the Committee by writing to it with that figure, but I do not believe that the settlement figure is in the public domain.

Q393 Chair: Well, it says, "could be copied by anyone interested in comparing the settlement sum with the claim." "Settlement sum" with "the claim"-those are the two figures I am asking for, and you said you could get them because they are in the public domain.

Anthony Inglese: No. I can certainly write to the Committee about anything that is in the public domain through the county court.

Chair: Can those people passing you endless notes from behind tell us what those two figures are, to help the Committee this afternoon?

Clearly they don’t want to.

Q394 Stephen Barclay: In terms of Vodafone, could you clarify whether with the settlement any discretion was exercised over the £1.25 billion, or was that the correct amount in law?

Anthony Inglese: I’m afraid I cannot go into that; I cannot comment on it.

Q395 Stephen Barclay: I am just asking from a legal process point of view whether any discretion was exercised.

Anthony Inglese: I can say at a general level that when a settlement is reached it is reached by agreement.

Q396 Stephen Barclay: But Mr Hartnett said that no discretion was exercised: he did not take a penny less than the correct amount in tax. As a matter of law, I want your confirmation as to whether that is correct.

Anthony Inglese: It is my understanding that it is correct.

Q397 Stephen Barclay: So, no discretion over interest was exercised?

Anthony Inglese: My understanding, from speaking to all my colleagues, is that the Vodafone settlement was correct.

Q398 Fiona Mactaggart: We have learnt that you are a cautious lawyer from the way in which you have responded to us, and I am wondering what advice you gave to Mr Hartnett before he went to talk to Goldman Sachs, and whether you think he followed it.

Anthony Inglese: I wasn’t involved in the settlement at all.

Q399 Fiona Mactaggart: That was not what I asked you. I asked you what advice you had given him before he went to talk to Goldman Sachs.

Anthony Inglese: Sorry, I wasn’t involved in the Goldman Sachs matter at all until I was asked for advice on the mistake.

Q400 Fiona Mactaggart: He never asked you for advice in advance?

Anthony Inglese: I personally was never asked for advice in advance.

Q401 Mr Bacon: And nor were any other lawyers, were they? Mr Hartnett made that clear.

Anthony Inglese: I have just said that.

Q402 Mr Bacon: No, you said you; but it is correct, isn’t it, that no other lawyers were asked either?

Anthony Inglese: Sorry, I think that I have missed-

Q403 Mr Bacon: One of the things that struck me in your answers to Mr Barclay about Vodafone was that you said that lawyers were involved throughout. One of the issues in relation to the Goldman Sachs negotiations was that lawyers were not involved. So it is no surprise to me to hear that you were not involved. I was just getting you to confirm that no lawyers were involved. In a recent evidence session, when I asked Mr Hartnett whether there was a legal error in thinking that you could not charge interest, he said, "Yes". I then said, "Whereas you actually could." That is to say, that you could charge interest. Then I asked him, "In coming to the conclusion that you could not charge interest, did you consult lawyers about that?" Mr Hartnett said, "No". It was not just that he did not consult you; he did not consult lawyers. Yet in the Vodafone case, lawyers were involved throughout. If he had consulted lawyers, he would have presumably been told that the apparent legal impediment to the charging of interest-a rather odd apparent impediment anyway, as charging interest is fairly standard, as we’ve established-was no such thing. There was no impediment, and one could charge interest. That’s correct, isn’t it?

Anthony Inglese: Sorry, that is a very long question. That’s correct at the end.

Q404 Mr Bacon: It is correct that there was no impediment?

Anthony Inglese: I think-

Q405 Mr Bacon: Sorry, it was a long question. Let me break it down. It is correct to say that there was no impediment to the charging of interest?

Anthony Inglese: I can’t comment on that.

Q406 Mr Bacon: Okay, but it is certainly correct that neither you nor any other lawyers were consulted?

Anthony Inglese: I have already said that one of the things that Mr Hartnett and I have discussed as a learning point is that where there is litigation afoot and a settlement discussion takes place, it is always good practice to consult the litigating lawyers in case something is there.

Q407 Mr Bacon: Yes! You have answered what to me is one of the most astonishing sentences. It is blindingly obvious to everyone-except, apparently, to Mr Hartnett-that what you have just said is sensible and good practice. Mr Hartnett said to you, "Oh, one of those cases-it’s settled." To say that without having talked to a lawyer about the terms on which it is settled is one of the most extraordinary aspects of this. Do you not think that it should be not just good practice but required that when HMRC is settling cases, legal advice is obtained?

Anthony Inglese: I think that where there is a piece of litigation on the go-I need to take a step back because obviously, I am going to say yes to that-one has to remember that in HMRC our clients, if I can call them that, include many thousands of highly skilled tax professionals. They know quite a bit of law as well, and they have the carriage-in other words, they have the lead-on all these cases. They are the ones whom the lawyers work to. They involve lawyers when it’s in their judgment that they need to. I won’t spend any time now on it, but there are lots of very good reasons why lawyers should be involved. There are also lots of cases where a settlement discussion is taking place and the law is well-trodden: it’s about the facts and it’s about accountancy; lawyers don’t need to be involved. The main thing that I sought to help this Committee with right at the beginning is that it’s a fallacy to think that every single settlement needs to have heavy legal involvement. But where there is litigation, then yes, because the lawyers should be able to offer advice on maybe a key issue in the litigation, or maybe costs or something like that.

Chair: That is very helpful.

Q408 Mr Bacon: Particularly when the bone of contention-for example, whether or not interest was payable-was that HMRC had threatened that if a particular client held out, in the way that Goldman Sachs did, interest would continue to be payable. That was one of the nubs of contention, wasn’t it?

Anthony Inglese: I do not want to go into that case, but every case has something and it is always worth checking what that thing is that people need to look out for when arriving at a settlement.

Q409 Chair: In thanking you for your evidence, can I just ask two very short final questions? Given that a mistake was made, do you agree that the courts should quash the settlement and then reconsider it on a proper legal basis?

Anthony Inglese: That is the subject of this imminent judicial review.

Q410 Chair: Well, there is not a judicial review, but do you agree that that would be the best way forward?

Anthony Inglese: I cannot comment on that. There is an imminent judicial review, and I expect the application will happen soon. HMRC will be responding to the pre-action protocol letter with a letter of our own, and at the moment we are still considering it.

Q411 Chair: It is a pre-action. Can I just ask a very final question? I understand that you were obviously concerned with giving evidence on an issue like this. Can you just tell the Committee how much taxpayers’ money was spent coaching you for today’s appearance?

Anthony Inglese: Zero-I hope it does not show.

Q412 Fiona Mactaggart: Chair, can I squeeze in one small question? Would it not be in the interests of the taxpayer not to contest this judicial review, but to concede, to collect the tax that we are owed because of this mistake and to not spend money on lawyers defending a judicial review?

Anthony Inglese: I cannot comment on that.

Chair: Okay, thank you.

Examination of Witnesses

Witnesses: Dave Hartnett, Permanent Secretary for Tax, HMRC, and Sir Gus O'Donnell, Cabinet Secretary, gave evidence.

Q413 Chair: Welcome. Sorry to have kept you waiting. It is a bit cold in this room, so you were probably warmer in the corridor. Can I start with you, Sir Gus? Do you accept-

Sir Gus O'Donnell: May I say, Madam Chair, that, after our meeting, there are a couple of things that I can update the Committee on? Could I do that first-a bit of news for you that might be interesting?

Q414 Chair: Go on.

Sir Gus O'Donnell: As you know, we talked about oversight and the accountability of large tax deals. We had those discussions and talked about some ways forward. One of the issues you raised was the issue of tax Commissioners, and I am pleased to be able to announce that the Queen has approved two new tax Commissioners: Steve Banyard, the acting director general for personal tax, who started life as a tax professional in the Inland Revenue, has been there all his life and has a deep knowledge of tax; and Simon Bowles, the chief finance officer in the department, who is an accountant by profession, for which I forgive him, because he was at Trinity College, where he read economics-that is close to my heart. So there are two new Commissioners, which I think is good.

Secondly, as you know, David has written to you about the whole issue of how we move this forward in terms of having some extra accountability, in terms of external professional input into these large deals, and of how we extend the oversight. If you would like, you could go into more detail about those, because he gave just the outline in that letter. There was not time, but the plan will be to work on getting that process in place and having some final proposals go to Ministers by the end of the year. It would be good to get your reaction to that, but if want Dave to go into the details, I am sure he will be happy to do that.

Q415 Chair: Okay, I am sure we will come to that. I really am grateful for that and for the meetings that both Mr Hartnett and you held with a representative group from the Committee. In a way, however, those were private and it is important that we get some of the stuff on the public record. Let me start by saying that I think that "Commissioners" is a misnomer, because it suggests to both Parliament and certainly the public that there is a bunch of people overseeing the work of HMRC who exist outside the executive structure of HMRC, and that is not right. The two Commissioners that you have announced both have tax experience, which is welcome, but they are both part of the HMRC structure, are they not?

Sir Gus O'Donnell: Indeed, yes.

Q416 Chair: I think that is a problem. It brings me to the key issue-I hope you will accept this, because then we can have a discussion about how we take the process forward-that there are structural problems with the present settlement of how HMRC administers itself, particularly in relation to tax disputes with large corporate bodies. I will present those as two issues and I wonder whether you will accept them on the record. One is that we have to have a proper separation between those who negotiate a particular deal with a corporate body and those who authorise that deal, hence my concern about the Commissioners. Indeed, I think that, in 75% of the cases that were looked at by NAO, there was no separation between those who negotiated the deal and those who authorised it.

Dave Hartnett: Chair, I am sorry, but that is not correct.

Q417 Chair: There was no proper separation in 75% of the cases. I would give you the quote, but I have not brought it, because I did not think it would be of contention. It was in paragraph 11 of the NAO Report. I have not brought it, but I have a bit of a memory for it.

Sir Gus O'Donnell: I think it’s the other way around, Madam Chair. I think that 75% were fine.

Chair: No.

Paul Keane: We looked at 27 cases all together. There were four where the department put in place specific governance arrangements-this is paragraph 11-and in three of those four, one or both of the Commissioners were involved in both negotiating the case and approving the settlement.

Q418 Chair: Three out of four is 75%. You might say that it is not a representative sample, but it is 75% of the ones they looked at. That is the first issue. The second is that, when you are talking about £25.5 billion, which, again, is the figure in the NAO Report, there has to be a proper system of accountability for those settlements to Ministers and to Parliament-a system that is independent of the machinery of government that is responsible for it. Do you agree that those are the two structural issues with which we have a problem?

Sir Gus O'Donnell: Yes. I think it would be fair to explain the context. This is in a world in which we are moving towards doing the large settlements in a very different way from how we used to. That has resulted in very big increases in revenue. I would like to put on the record my thanks to Dave Hartnett for the things that HMRC has done. We would be in a really bad situation if we had not got the extra billions that have been achieved through some of the things that the Revenue has got through in the past few years since the merger.

Q419 Mr Bacon: Are you saying that we are not in a bad situation?

Sir Gus O'Donnell: We are in a less bad situation than we would be.

Q420 Mr Bacon: All the newspaper headlines say that we are in a very bad situation.

Sir Gus O'Donnell: Well, we are not in the euro, Mr Bacon.

Q421 Mr Bacon: Thank goodness. But that money coming in also depends on how much is being lost through the settlements.

Sir Gus O'Donnell: Indeed, but I would say that the real savings of £1.4 billion, starting at a time when staff are being cut by about a quarter-

Mr Bacon: No, no.

Sir Gus O'Donnell: -when compliance increases have gone up and there is a reduction in the tax gap, all those sorts of things are big, objective, real billions of pounds of savings. To come back to your question, Madam Chair-it is important that we answer the questions that are put to us-first, on the negotiations and trying to get the appropriate degree of separation, absolutely, there is work in hand to do that. I agree. As we evolve through sorting out how to get the best out of these things, that is exactly right. We need more tax Commissioners to do this, which is why the point that I made right at the start is the crucial one. Secondly, the question of external independence is a very good point. I discussed with you how do we ensure that we can get some external, professional oversight that can look at individual cases.

Q422 Chair: You will get a lot of opportunity to tell us what you are doing, Mr Hartnett. Sir Gus O’Donnell, can I come to you with this? As head of the civil service, what is your priority? Is it to protect taxpayer confidentiality, or to protect the public interest in ensuring that moneys are due to the Exchequer?

Sir Gus O'Donnell: It is absolutely not an either/or. Both.

Chair: Okay, but at the moment, it is.

Sir Gus O'Donnell: No it’s not.

Q423 Chair: Because in the evidence that we have had from HMRC, taxpayer confidentiality has taken precedence over our duty to protect the public interest in terms of ensuring that we get the revenue.

Sir Gus O'Donnell: There is a statutory requirement on taxpayer confidentiality-we do not want civil servants breaking the law, that is certainly true. But it is absolutely crucial that when it comes to individual cases, the National Audit Office has complete access to all the papers-no ifs, no buts; it gets to see them all. I hope that the NAO, as I detect, gets absolute access to all the papers.

Amyas Morse: Yes.

Sir Gus O'Donnell: That is exactly as it should be.

Q424 Stephen Barclay: Of course, no one would want civil servants to break the law; that is a statement of the obvious. If there is a gateway that permits disclosure, they wouldn’t be breaking the law, would they?

Sir Gus O'Donnell: No.

Q425 Stephen Barclay: So could we come to the point about what in statute prevents you from disclosing information to Parliament?

Sir Gus O'Donnell: I will be governed by professionals on that.

Dave Hartnett: Mr Barclay, as I have said before, I think we agreed at the last sitting that providing assistance to Parliament is one of our functions. But it is quite a big step from providing assistance to actually providing detailed information about individual taxpayers. As I think we explored before-this is in my letter to the Chair; I’m sorry, I can’t remember the date but it was when I set out the law on taxpayer confidentiality-the Commissioners of HMRC have a role in determining the approach to taxpayer confidentiality, and in 2009 they made a decision about that. Last time we also explored very tentatively whether there was a way of having a confidential briefing before the Committee, which was maybe manageable within the general strictures but did not become public.

Q426 Stephen Barclay: Sure, but those are different issues. If a mistake has been made or the law has been broken, does Parliament not need to know so that it can consider whether the law needs to be amended?

Dave Hartnett: Taking a mistake that we have discussed before, Parliament does know about it because the NAO reported it.

Q427 Chair: No, Parliament knows about it because The Guardian reported it, and Private Eye-not because the NAO reported it.

Paul Keane: We did report a mistake in the Report we just produced-

Chair: But that was after The Guardian.

Paul Keane: No, it’s in the Report.

Q428 Stephen Barclay: But we don’t know the size of the mistake; we don’t know the value of the mistake.

Dave Hartnett: With respect, didn’t Mr Morse give you a number at the last hearing?

Q429 Chair: A range.

Can I just put it to you this way? If it had been a grant to Goldman Sachs of anything between £5 million and £10 million, or whatever, we would all know about that. That would be in the public accounts. In effect, this is a grant-the forgoing of interest is a grant-yet we don’t know.

Sir Gus O'Donnell: I think it has been very clear. It was in the Report. You were told about it.

Q430 Stephen Barclay: We are trying to establish the legal position rather than the NAO view. From a legal position in terms of statute, I will come to the question that I put to Mr Inglese: is there any distinction between identifying and non-identifying information in the 2005 Act?

Dave Hartnett: I cannot recall a clause that says that, but-this won’t surprise Mr Barclay-we have looked back over tens of years, decades even, to see how taxpayer confidentiality has been applied, and it has constantly been applied like that. This goes back to your point about the role of the Commissioners, and they have made a distinction between identifying and non-identifying information.

Q431 Stephen Barclay: But we were not looking at the historic legal position. You have been quoting the 2005 Act, which does not draw a distinction, so it is policy reasons that go to the heart of why you are not disclosing. The point is, you have discretion, but the argument you have been putting repeatedly is that by law you are prevented by the 2005 Act from disclosure, and yet that Act has a gateway, so do you accept that you are not prevented from disclosure by the 2005 Act?

Dave Hartnett: All my advice so far has been that my colleagues and I are prevented by the Act and by the decision of the Commissioners.

Q432 Stephen Barclay: Even when information is in the public domain.

Dave Hartnett: Even when information is in the public domain, unless it is in the public domain lawfully.

Q433 Stephen Barclay: Well, one assumes that appearing in Vodafone’s company accounts is lawful disclosure in the public domain.

Dave Hartnett: Frankly, it depends what appears in Vodafone’s accounts.

Q434 Chair: I shall go to Ian and then I want us to get back to the principal stuff before we come to the specifics.

Q435 Ian Swales: On this organisational and accountability question that the Chair started with, I think I am right in saying that-it is very welcome news that we have two new tax Commissioners-six of the 10 executive committee members are also tax Commissioners. The ones missing are the chief people officer, the chief information officer and, ironically, Mr Inglese, whom we have just had in front of the Committee. But six of the executive committee are now Commissioners. Of those six, four are actually on the board of HMRC, and the rest of the board is made up of five non-executives. The key point here, as I understand it, is that the non-executives do not have access to what you would regard as confidential taxpayer information, which is the type of problem that we have in this Committee. In other words, we have a little circle here at three levels, which are basically the same people, but slightly fewer at each level. In terms of assuring us, how do you feel about the levels of control and scrutiny of large deals, given that structure?

Dave Hartnett: I think, Mr Swales, this is one of the things I am rather hoping to be able to say something about during this hearing. We think there is potentially a significant role, a non-executive role, for looking at the large settlements. What do I mean by large? Perhaps £100 million or more. We have to make this manageable.

Q436 Chair: How many each year are the £100 million or more that you would consider?

Dave Hartnett: I’d have to guess, Chair.

Q437 Chair: Well, guess.

Dave Hartnett: A few tens, but they are very complicated cases.

Q438 Chair: Okay. How many in the £50 million to £100 million range?

Dave Hartnett: I am guessing again-a number of more tens. A higher proportion.

Q439 Chair: And how many under £10 million to £50 million?

Dave Hartnett: I don’t know the answer to that. May I write to you with the numbers?

Q440 Chair: On the issue that we raised in the meeting with you, it seems to us-the Goldman Sachs issue is £10 million; the taxpayer lost £5 million, £8 million, £10 million, or whatever the figure is-any oversight system needs to capture that.

Dave Hartnett: I do not want to get into difficulty here with either taxpayer confidentiality or with the Committee. The figure of £10 million in relation to Goldmans is a number that has been put out in relation to interest. I would not want the Committee to think-I am trying to be very careful here-that that number fixes that matter in the ranges you talked about.

Q441 Chair: So what number does?

Dave Hartnett: I can’t go there, for reasons of taxpayer confidentiality.

Q442 Chair: You can go there in numbers. You are not identifying any individual.

Dave Hartnett: What we are talking about is Goldman Sachs. I think the issue will be resolved if the NAO goes ahead with their more detailed study of cases, with some tax expertise.

Q443 Chair: I am really talking about the general here, not the specific. On the general, it seems to me that we still have not resolved the matter. I welcome the new Commissioners, but they are all executives; they are all guys who have worked in HMRC. That does not give you the separation that we are after, and then there is the other thing-the oversight. We were at £200 million when we talked to Mr Hartnett last week. He has come down to £100 million. Actually, there is an issue beyond that. Let us take £10 million as the figure. That is a lot of money. We need to have some assurance here in this Committee that there is a proper system of accountability that digs down.

Sir Gus O'Donnell: We need to work on the details, but the general point is accepted. We actually need to extend the governance structure to bring in some external, professional input that can look at these cases. Precisely the degree of input you need at the different levels of-sometimes, it is about tax and sometimes, it is about complexity, so there is more than one dimension to this.

Q444 Mr Bacon: Sometimes, it is about process. Sometimes, it is about observing the governance that exists.

Sir Gus O'Donnell: Indeed, in which case, you might want to go through a different route for the very big ones. You might want to have someone there all the time, as you go down the track. You might want to eventually get to a point where you are doing sampling, for example, so you will want to graduate it according to your degree of concern, which is absolutely right. I think we can manage both of those things.

Q445 Ian Swales: Have you got any proposals on how you might actually achieve that? How could you have more confidence? As we discussed in the private meeting, it is in the interests of HMRC to have such an assurance, not just for the outside world, but within your own processes.

Dave Hartnett: We completely agree.

Q446 Ian Swales: If you haven’t got any answers now, how are you going to get to them and what sort of proposals do you think you will be making?

Dave Hartnett: Let me raise seven that we are exploring. The first is something we have already put in place on the back of the National Audit Office Report, and that is much greater or, indeed, complete separation between those who negotiate settlements-there are not many negotiated by Commissioners, but some are-and those who actually approve the settlements. We have done that already.

Secondly, we want to bring much more transparency to the process.

Q447 Ian Swales: Just to confirm, you say that you have done that already.

Dave Hartnett: We have.

Q448 Ian Swales: You have separated negotiation from approval.

Dave Hartnett: Yes. Secondly, we want to increase transparency by publishing our guidance around this, so that everyone knows what we expect of our people. The third possibility-it is not in our hands to do this-is to see whether large settlements could in some way be referred to the first-tier tax tribunal.

Q449 Chair: I said to you that I think that is complete nonsense, because they are the ones who would sit in judgment if there is any litigation. You cannot expect them to be judging-that is just a non-starter, Mr Hartnett.

Dave Hartnett: Chair, what I was trying to do was cover the ground.

Q450 Chair: Okay, but it is a non-starter.

Dave Hartnett: The fourth is to see whether we could have some role like an independent assessor, or assessors, to sit alongside Commissioners in the decision-making process. It was put to us at one stage that maybe these individuals could be Commissioners. The difficulty with that is that the Commissioners are charged, in the Commissioners for Revenue and Customs Act, effectively with running the department, so the concept of a non-executive Commissioner would require some change in law, or for the role to be as though it were a Commissioner-so, a commissioner-like role-without actually being one.

Q451 Mr Bacon: On that point, if the situation is as you described it, which I believe it to be, there might be a need for a minor change in the law. Although the Committee does not get involved in policy matters, in terms of the direction of Government policy-whether we spend more on roads or rail-it would be within the Committee’s purview to recommend that the Government looked at legislation if it were to tidy up the administration of HMRC. It would be a relatively minor adjustment, would it not?

Sir Gus O'Donnell: I really want to make progress on this. I can tell you how to slow things down dramatically and that would be to go down that route. If you are really interested in changing these things quickly, I would suggest trying to go down the non-legislative route.

Q452Mr Bacon: What I am interested in doing is getting it right. The present architecture is obviously not adequate. In fact, in our earlier meeting, Mr Hartnett said to us that it just won’t do to have tax Commissioners doing deals and then scrutinising them, as it were-and he accepts that-so the architecture is plainly not there yet. It is important that we have the right architecture and that the institutions are properly staffed up with the right personnel. I am not clear why it would delay things hugely to have a small adjustment.

Sir Gus O'Donnell: I suppose I have a bit of inside information here, because I was sitting in Cabinet when they discussed the legislative programme, so I am very aware of the constraints on that programme. I can just imagine the discussions about precisely what level of priority this would have. All I am saying is-

Q453 Mr Bacon: But you are talking about-let us see what the relevant piece of legislation is-the Commissioners for Revenue and Customs Act 2005, which was presumably being prepared when you were permanent secretary at the Treasury. That is right, isn’t it?

Sir Gus O'Donnell: Yes-it spanned my period as permanent secretary and then Cabinet Secretary.

Q454 Mr Bacon: This could be amended. We are talking about a really quite small change. This could presumably be amended either through a Finance Act or through a small-the Treasury is shaking its collective head.

Paula Diggle: I am absolutely certain that that could not go in the Finance Bill, I’m sorry, Mr Bacon.

Q455 Mr Bacon: It could not go in the Finance Bill, so it would have to be done separately.

Paula Diggle: Yes.

Q456 Ian Swales: To some extent, we are talking about what’s in a name, because I think when you launched this-

Sir Gus O'Donnell: I want to give you an answer to this, which is effective and quick and does what you want.

Q457 Ian Swales: When you suggested this fourth option, you said that it could be implemented in a shadow way, so that the person might not have legal status as a Commissioner but could act. It could be a two-stage process: you could have that situation and then, if you wanted to make the change in law, you could do that. Does that make sense?

Sir Gus O'Donnell: We did it with the shadow Monetary Policy Committee-set it up straight away, and it operated-

Q458 Mr Bacon: We did it with the Comptroller and Auditor General.

Sir Gus O'Donnell: Exactly. Both ways. You can do that. All I am saying is that you do not wait for progress and say, "Don’t worry, it will be in legislation, we won’t do anything until then." I am saying, "Get on with it, you can do things now."

Q459 Ian Swales: So that is four of the seven.

Chair: And then Meg who is waiting to come in, very patiently.

Dave Hartnett: The next option, which I do not think will hold much attraction for the Committee but which we have been thinking about, is to create an external regulator of some sort.

Q460 Chair: Yes, there is no attraction because there is no money. Right?

Dave Hartnett: So, no Oftax-

Q461 Mr Bacon: Did you say, "No tax", Mr Hartnett?

Dave Hartnett: Sadly, Mr Bacon, you and I have been here before, and no I did not say, "No tax." Then, an increased role for the NAO. I have not discussed that with Mr Morse, but the idea would be-

Q462 Chair: That’s not a starter either, because that muddies it. It is like the tribunal-you cannot have the tribunal or the NAO taking on a dual role. That is why the only options, out of the ones you have given us, are to have external-Mr Bacon would like to call them commissioners-bodies, people with credibility and experience to dipstick into the cases with lower monetary value and really look at the ones of a higher monetary value. I would take £50 million plus as a high monetary value.

Dave Hartnett: The last one would be to see-we would need to explore this with the National Audit Office-whether it is possible, as part of whatever the solution is, to put more information into our annual accounts. We would like to see whether we can find a way of picking up Mr Barclay’s point, and that is that you don’t know how much of that tax is at stake, how much we should collect and how much we actually collect. I think there is a case for finding a way, if we can, of meeting that challenge.

Sir Gus O'Donnell: So we do it in the aggregate, as it were, and not in individual cases.

Q463 Chair: Yes, the aggregate would be brilliant, and we have asked for that. We asked for that figure last time around.

Sir Gus O'Donnell: And we are responding.

Q464 Meg Hillier: On the independent assessors, just to be clear, you are effectively saying that they could be appointed by Ministers in shadow form tomorrow-more or less. Legally, would HMRC be able to let them have access to that tax information? We have heard all this issue about criminal sanctions, and it is far from free of doubt whether information can be revealed; but it could be if it was a ministerial appointment.

Dave Hartnett: There is a question of whether Ministers are the right approach. Another approach, which builds on what Mr Swales and Mr Bacon were saying, is that maybe these were-I cannot think of a better badge-special non-executives of HMRC for a single purpose, which was overseeing the large settlements. Because they would be non-executives of HMRC, issues of taxpayer confidentiality and the like would be easier to manage.

Q465 Meg Hillier: So as an interim, that could happen. On making it statutory, I know that independent assessors exist, and I have worked with them in government very effectively, but they are very independent. They are able to dip in where they choose. Primary legislation is obviously an option, but I completely take the point about how long it could take. Do you know whether, under current law, it could be introduced under secondary legislation, or is that something you could write to us on?

What I am trying to drive at is how quickly this could be done at a very independent level and whether it could be independent of HMRC. There has been a blurring, which we have gone through-it was rehearsed by the Committee before I was on it. Could it be done so that assessors are independent and statutory?

Sir Gus O'Donnell: I wanted to get these issues out with the Committee now, because I would like to be able to discuss those sorts of things. You can get something up in shadow form, but maybe there is a question of what you mean by independence. Ultimately, you might say that it has to be statutory independence, in which case there would obviously be some kind of legislation. We can think through the options. All I am saying is that I think we can solve what I regard as the real problem: getting across to you that HMRC does this very well. I happen to believe that, but you need to be happy that it is happening. We could go through the various options of shadow, whether it could be done in secondary and how we would adjust primary, and all the rest of it.

Q466 Meg Hillier: I take in good faith what you said, Sir Gus, about having a new way to do these deals to make sure that money is brought in and that taxpayers get some money from the big players. But it is very clear from the Committee that as representatives of the taxpayer, we want to see an independent watchdog. How quickly can that be done? Could you write to tell us? A statutory instrument could be introduced very quickly if it could be attached to the Act. That is easy and could be done relatively quickly with political will; other things could take a lot longer.

Sir Gus O'Donnell: The plan is that we would come to you with proposals before the end of the year. You would then have a graduation-different things that will take different amounts of time. But I would like to think that there will be at least one option that will give you something fairly immediate.

Dave Hartnett: Ms Hillier, may I come in? I cannot immediately think of an enabling power in the Commissioners for Revenue and Customs Act that would enable this to be done through secondary legislation. We then get back to the issue that the Treasury Officer of Accounts raised, but we will explore it.

Q467 Mr Bacon: Who appoints HMRC non-executive directors?

Dave Hartnett: HMRC, by open competition.

Q468 Mr Bacon: And who runs the competition?

Dave Hartnett: A civil service commissioner, I believe.

Q469 Mr Bacon: So the competition is separate from HMRC.

Dave Hartnett: The competition will be chaired by a civil service commissioner with senior officers of HMRC and, usually, someone from another department on the panel.

Q470 Mr Bacon: Is the Cabinet Office involved in the appointment of non-executive directors?

Sir Gus O'Donnell: Absolutely. The lead non-executive director for Government, Lord John Browne, is based in the Cabinet Office. We have gone through a process of selecting new non-execs on the new boards that have been set up, which are chaired by Secretaries of State across the whole of Government. I cannot say this highly enough: I am really pleased that we have been able to attract very good non-execs who have come in to help in departments and are proving really worth while in terms of their ability to give us, sometimes, commercial input and sometimes to challenge Ministers as to whether we need another new initiative just now.

Q471 Mr Bacon: I applaud all that. As you know, Lord Browne has appeared before this Committee.

Sir Gus O'Donnell: Indeed.

Q472 Mr Bacon: My specific question is about HMRC’s non-executive directors. Although the structure that you are describing and the way that it is developing is welcome, it seems to me that HMRC non-executive directors must be in an almost unique position in relation to non-executive directors of other departments. Non-execs elsewhere probably feel that they have everything they need in order to scrutinise successfully their departments, with possible exceptions in security and intelligence or defence, although one hopes that those people are security-cleared.

But in relation to what we have been discussing about confidentiality, non-executive directors in HMRC are in the same position as pretty much everyone else. They are in the same position as members of the public. They get the same answers. Mr Hartnett has confirmed to us that this actually happens in HMRC board meetings: the answer is given, "We can’t discuss that with you as a non-executive director, because it would be breaking taxpayer confidentiality." My question is this: aside from what you are talking about doing in relation to the independent assessor or whatever we end up calling it-the shadow function that may or may not lead to statute changes-is the structure of HMRC and its non-executive directors adequate to enable those people to do their jobs as scrutineers?

Sir Gus O'Donnell: Remember that HMRC is different from, say, DCLG. When you are talking about DCLG and setting up a board, you have a Secretary of State chairing that board. In HMRC, you are talking about a non-ministerial department. Right away, you’re in a different world. You are right that the analogy is not one for one. HMRC has had a different structure to a standard Department led by a Secretary of State. It is not quite the same.

In terms of the non-exec directors, my experience of the board is that they have been quite a challenging lot, to be honest, but they have not got into individual cases. They have been challenging more on overall processes, structures and organisation.

Q473 Mr Bacon: But what I am saying is that if they wanted to, they couldn’t. There ought not to be limits on where they can challenge. There is a structural, architectural problem, is there not?

Dave Hartnett: Mr Bacon, there is another issue, which we have wrestled hard with over the years. As I said to you before, we have the sense of a need for more oversight, and we have had for a while. The difficulty with non-executives and tax is that, like many other non-executives, they have other roles as well. Picking a non-executive who has no other role, and therefore no conflict, or potential conflict, of interest, could have difficulties.

Q474 Mr Bacon: That often happens. Somebody will be the director of a bank that lends money to all kinds of corporates, and also a non-executive director of some other plc that is the recipient of loans from a bank or vice versa. Conflicts can arise, but it is all solved by company law and by the requirements on directors to observe their fiduciary duties. Why is it any different here?

Dave Hartnett: We have done it the other way round. For a period of time a number of years ago, we allowed one or two of our executive directors to pick up non-executive posts. We found the conflict impossibly difficult.

Q475 Mr Bacon: I thought you were going to say they kept on being paged.

Dave Hartnett: Impossibly difficult. That has been one of our concerns. At one stage, three of our non-executives were immediately retired chief finance officers, two of banks and one of a large global manufacturer. They were great people to have as non-executives, but we could not have talked to them about tax-that was our view-because even though the fiduciary duty was there, we needed to be able to tell the world that these individuals were not seeing tax issues.

Q476Mr Bacon: All the more reason to create a special architecture to-

Sir Gus O'Donnell: Just on that one point, remember that there is-I brought it with me; a hot seller-the Cabinet manual, first edition thereof. It refers in the ministerial code not just to the question of conflicts of interest but of perceived conflicts of interest.

Q477Mr Bacon: Yes, I wanted to come to that later.

Sir Gus O'Donnell: You can imagine that if you had as a non-exec one of the people you wanted, and you just did some of the things you mentioned casually-saying "Okay, they can recuse themselves from that"-there would still be some issues of perception.

Q478 Chair: Can I ask you something about this non-ministerial department status? After we had our discussion when HMRC lost all those disks-

Sir Gus O'Donnell: Two disks, of which nobody has ever lost a penny. Can we go back to that?

Q479 Chair: Okay, I am not trying to rake up issues.

Sir Gus O'Donnell: And who knows whether they existed or not? It is an interesting question.

Q480 Chair: What I wanted to ask you was this. At that time, Alistair Darling felt he was accountable, and he came and explained himself to Parliament.

Sir Gus O'Donnell: And, if you remember rightly, the person in charge of HMRC at the time, Paul Gray, resigned. He knew nothing about the disks and was not involved with them-

Q481 Chair: But the point is that the Minister was accountable.

Sir Gus O'Donnell: He took it on his shoulders and he resigned.

Q482 Chair: The Minister felt accountable.

Sir Gus O'Donnell: But the official resigned.

Q483 Ian Swales: But it is this question about a non-ministerial department being accountable to Parliament. One thing to be explored is what do we mean by and how do we exercise that point about being accountable to Parliament? This is what, I think, the Chair is getting at. How that link operates in practice also needs clarifying.

Sir Gus O’Donnell: I think very much through the Minister and the Treasury-the Minister responsible.

Q484 Stephen Barclay: You referred to that in your letter of 19 October. In fact, one of the reasons for not disclosing to Parliament is because you also don’t disclose to Ministers.

Sir Gus O’Donnell: No, we don’t disclose individual tax matters to Ministers. That’s right.

Q485 Stephen Barclay: Why is that? Surely Ministers are coming to information in various forms all the time? If there is a conflict of interest, you would get another Minister to act.

Sir Gus O’Donnell: No. Well, you could argue that if you want to go down that route, where we give Ministers access to individuals’ tax records, but I would strongly oppose it.

Q486 Stephen Barclay: We are not talking here about individual people; we are talking about large corporates. This is like the nonsense in this letter that talks about the European Court of Human Rights. We are not talking about people’s family life; we are talking about settlements with large corporations.

Sir Gus O’Donnell: What if it is an individual who is in charge of a large corporation?

Q487 Stephen Barclay: Sure, and you have that within the governance. The two cases that we are trying to get to in these hearings, which are Vodafone and Goldman Sachs, are not dealing with individuals’ family life-we are talking not about sole traders, but about large corporations. Yet this letter sets up a number of policy red herrings, where they could be managed in other ways.

Likewise, one of the other reasons you put forward is that it has a damaging effect on other Government Departments. If a company is breaking tax law, why is disclosing that damaging another Department? Could you give me an example of how that would be damaging another Department?

Dave Hartnett: I am just trying to think of an example where disclosure could impact another Department. It may be, Mr Barclay, that we learned something through our inquiry.

Sir Gus O’Donnell: Let me give you some examples. There have been tenders for contracts where a number of companies are involved, and one of them may well be in a situation where they are in litigation.

Q488 Stephen Barclay: If an individual Minister has a conflict, you get another Minister to deal with it.

Sir Gus O’Donnell: No. I have not mentioned a Minister at all. I am saying that there is a procurement issue that a Department is dealing with-it may have gone nowhere near a Minister. It is a procurement issue, where we are talking about a tender and where one of those companies is in a very difficult place with HMRC. There are some difficult issues for us as to how we handle those sorts of issue.

Q489 Mr Bacon: They did try to solve that one with EBS, when I think about it. It wasn’t the prettiest. It actually strengthens your argument. They did try to go down that route.

I have to say, Sir Gus, that I completely support what you are saying about keeping the separation. It is absolutely vital that we keep the separation, otherwise you will end up with the equivalent of President Nixon chasing his enemies, which he did, using the IRS. There is potentially a slippery slope, and I think it is very good to have clear boundaries, but there is a separate issue, which is given that that is the case, that it is a non-ministerial department, that tax Commissioners have all the authority they need to sign things off and that they are the ones who do the signing off, rather than Ministers, there is all the more need to have the right structures of transparency and assurance in place. I think we are agreed-are we not?-that those are not there to an adequate level at the moment.

Sir Gus O’Donnell: Absolutely. What we are saying is that in the way in which these large tax cases have been negotiated, we have been evolving the governance structure. I think the structure needs to evolve a bit further to have, as Dave mentioned, what is now in place-a separation between the negotiators and the people who do the oversight. In addition, if we can find a way through the legal issues, we should get ourselves someone external and professional-we probably can’t call them a Commissioner, for various reasons, because Commissioners have to run the department, and you want to separate them from running the department-who can have oversight of the process. Then we find a way to calibrate the degree of oversight, depending on the size, so we are very intensive on the very large and we go down towards a smaller and more selective sampling process.

Q490 Ian Swales: Before we leave it, there is the issue of how you are accountable to Parliament, if it is a non-ministerial department. We’ve got a situation where you can’t talk about detailed taxpayer records with your own non-exec directors and you can’t talk about them with Ministers. We have talked about the independent assessor route, but what about the parliamentary side of it? If Parliament is directly responsible for your activities, how are we going to exercise that function if we have legal barriers thrown up in front of us?

Dave Hartnett: One of the things that we would envisage, if we have this independent assessor-let me use that badge for a moment-that that individual, or those individuals, could report to Ministers on an anonymised basis. They could report to you on an anonymised basis.

Q491 Ian Swales: As a member of the Committee.

Dave Hartnett: I meant the Committee, yes. We thought that that would be a big step forward.

Q492 Chair: Can I ask you one final thing, because of this odd constitutional settlement? HMRC is a non-ministerial department. If a mistake is made, as there was in this instance, there should be a disciplinary procedure. You may decide at the end of the day that you do not want to take action and that is perfectly fair. Up to £10 million of taxpayers’ money went, so there should be a disciplinary procedure. Who is responsible for that?

Sir Gus O'Donnell: If a mistake is made in any department-let us be honest, HMRC is dealing with multiple cases and billions of pounds all the time, and its turnover is enormous. There will be mistakes all the time. Dare I say it, but all of us make mistakes? None of us is perfect. That is the way of things. It is right for the department to have, within its structures, ways to look at individuals and accountability. All of us are accountable to someone. David is accountable to Lesley Strathie, who is the chief executive of HMRC. Lesley is accountable to me. She is one of my direct reports. I have a large number of direct reports, as you can imagine. That is the structure. It looks at whether people are performing well and whether they are operating in accordance with the code of honesty, which is required of all civil servants. That is absolutely clear.

Q493 Chair: So in this particular instance with Goldman Sachs, where, because of Lesley Strathie’s leave, David Hartnett is fulfilling both her job and his own job, are you undertaking a disciplinary or an investigation of the particular circumstances that have caused this Committee quite a lot of concern, to see whether any disciplinary action should be taken? Do you see that as your job?

Sir Gus O'Donnell: Can I just ask Dave to come in first?

Dave Hartnett: Sure. Again, Chair, I need to be careful, but there was a thorough review of this mistake.

Q494 Chair: Who carried that out?

Dave Hartnett: The head of the large business service.

Q495 Chair: Was he one of the people-I do not know who that is.

Dave Hartnett: It was a woman, who is now retired. The learning points were identified and the error was taken into account in someone’s annual appraisal.

Q496 Chair: In?

Dave Hartnett: In someone’s annual appraisal. It affected their non-consolidated pay, because there was no pay rise that year.

Q497 Mr Bacon: They didn’t get a bonus.

Dave Hartnett: That is another way of putting it, Mr Bacon. I am not allowed to call them bonuses.

Q498 Mr Bacon: Presumably you do not have any of these structures in place where the bonuses are paid in such a way that they do not attract national insurance.

Dave Hartnett: No.

Q499 Mr Bacon: But you do have a property deal whereby your buildings are evading or avoiding tax, don’t you?

Dave Hartnett: Don’t I remember the NAO determining that that was a very good deal for the nation?

Q500 Mr Bacon: You possibly do, yes.

Sir Gus O'Donnell: I can assure you that they are all paid in cash, subject to tax and full national insurance.

Q501 Mr Bacon: I thought you were going to say in brown envelopes.

Sir Gus O'Donnell: No. Fully taxable and nickable, as they say.

Q502 Mr Bacon: Mr Hartnett, there are a few things that are established things between us, based on our previous hearings. They are a things that I think are facts, rather than conjecture. I want to confirm whether they are right. The first is that you invited the head of Goldman Sachs tax in New York to come to London for a meeting to settle the matter of the unpaid national insurance contributions and other matters.

Dave Hartnett: Well, I was trying, as I said last time, to manage the relationship, which was broken. Others were leading on the settlement.

Q503 Mr Bacon: But you invited him?

Dave Hartnett: I invited him.

Q504 Mr Bacon: You believed-wrongly, as it turned out-

that there was a legal impediment to the charging of interest to Goldman Sachs on the unpaid national insurance contributions.

Dave Hartnett: I did.

Q505 Mr Bacon: There was in fact no legal impediment to the charging of interest as it turned out.

Dave Hartnett: Yes.

Q506 Mr Bacon: Not only was there no legal impediment, but HMRC had actually warned Goldman Sachs, back in October 2005, that if it didn’t settle at the same time as the other banks which had been trying to run with the same national insurance avoidance scheme but which had given up and agreed to pay HMRC the money that it had demanded, interest would continue to pile up.

Dave Hartnett: Mr Bacon, you’re asking me to comment on a leaked document, but I want to try to be helpful. There were 22 letters like that. That is my understanding. I haven’t seen them all. They carried a calculation of interest to 31 October 2005-from memory. If I’ve got that wrong, I’ll come back to the Committee. Then they said that HMRC was offering to settle without a charge to interest, and I believe that was because there was a legal impediment and the legal impediment applied to all in 2005, or if it didn’t apply to all, I’m not aware of that.

Q507 Mr Bacon: Thank you; that was very helpful. It’s correct, isn’t it, that you didn’t consult lawyers about whether or not HMRC could charge interest?

Dave Hartnett: We did not consult lawyers.

Q508 Mr Bacon: And with regard to the meeting that took place, you didn’t know whether there had been a note of the meeting.

Dave Hartnett: There was a note-

Q509 Mr Bacon: At least not initially.

Dave Hartnett: No; I can answer that question now. There was a note prepared of the meeting-in fact, by Goldman Sachs, and our people believed the note was a fair reflection of what had taken place.

Q510 Mr Bacon: And once the mistake was discovered, you were given legal advice-Mr Inglese has basically said this-that there were a number of options, one of which was to unwind the agreement that had been reached and, indeed, to charge interest after all, and another option was to let matters stand. That’s correct, isn’t it?

Dave Hartnett: Yes.

Q511 Mr Bacon: You didn’t unwind the agreement, but you let matters stand. That’s right, isn’t it?

Dave Hartnett: Yes.

Q512 Mr Bacon: Also-you said this to us last time-several times you met the leading QC David Goldberg, who was an adviser to Goldman Sachs, for lunch. That’s right, isn’t it?

Dave Hartnett: I have met Mr Goldberg for lunch. I’m not sure that I was aware that he was an adviser to Goldman Sachs-

Q513 Mr Bacon: Indeed. I fully accept that that’s possible. I don’t necessarily think that you’ve done anything wrong-

Dave Hartnett: Thank you.

Q514 Mr Bacon: And I’m certainly not accusing you of anything. There’s a separate question of how one feels. I think the Chairman accused you of having had 107 lunches. I only counted 94 on the schedule, but think how it makes us feel when you’ve had that many lunches and we weren’t present at any of them. That aside-

Dave Hartnett: May I just say one thing about the lunches? I was concerned about what I saw-probably I was the only person in the room who saw it-some suggestion of improper behaviour. I went back and had a look at them all and I found three which involved a taxpayer.

Q515 Mr Bacon: Right. All that was a predicate, because the point, surely, is not whether you’ve acted improperly or not. The point is whether the impression could be created that you had acted improperly, regardless of whether that was a fact. Just as the ministerial code is very clear that Ministers must ensure that no conflict arises, or could reasonably be perceived to arise, between public duties and private interests, financial or otherwise, there’s a similar, analogous sentence in the civil service code, which says that you "must not…accept gifts or hospitality or receive other benefits from anyone which might reasonably be seen to compromise" your "personal judgement or integrity".

I am not questioning your personal judgment or integrity-I’m just not. For what it’s worth, I think that Sir Gus is correct in saying that you have done a lot to bring in extra revenue. But you must surely accept that the pattern of all this behaviour has led some people to conclude-quite possibly not wholly unreasonably, if I can use a sort-of double negative-that there might be a connection. You have allowed-to take the words from the ministerial code-the possibility of a perception to arise that there could be a conflict, even if there isn’t one. Do you accept that?

Dave Hartnett: I find it a very difficult proposition, Mr Bacon. I have tried very hard indeed to ensure that my line manager, my colleagues and-by publishing these engagements-people generally understand. The thing I have done most often, I think, is to meet representative bodies to speak over lunch and, occasionally, to meet tax leaders of the major accounting firms to explore difficult issues. Looking back, I have often done that with a colleague so that I am not on my own. We could have explained that much more fully than we have done, but that is the truth of it.

Q516 Mr Bacon: I am fully prepared to accept that as completely the truth. I am not really talking about the truth; I am talking about-

Dave Hartnett: We are talking about perception.

Q517 Mr Bacon: I am talking about perception. It is perfectly reasonable for people to conclude, however wrongly, that your pattern of behaviour, in blunt terms, looks like you have done a deal with Goldman Sachs, which was done without consulting lawyers, when you are seeing Goldman Sachs’s advisers for lunch. That is what it looks like, and people will put two and two together and make seven. That is what people do. It is entirely possible that that is quite wrong-I am sure it is wrong-but it is not completely unreasonable for people. It just feels a bit odd, even though I am not for one minute suggesting that what you have done is actually wrong. I do not think you have done anything wrong, but do you see the point I am making about perception?

Sir Gus O'Donnell: The fundamental flaw with that argument is that, if you discovered that Dave was secretly having these lunches and had not told anybody, it is a fairly weird conspiracy when it is all published, and we took the initiative to publish all of these things. I publish all of my hospitality to a very low level-a much lower level, I might say, than a certain other group.

Q518 Mr Bacon: You mean MPs?

Sir Gus O'Donnell: Yes. It is 650, isn’t it?

Q519 Mr Bacon: Perhaps we should publish everything.

Sir Gus O'Donnell: But then you will get people coming up and saying, "Aha, Mr Bacon, you had lunch with X. Can I put forward a conspiracy theory about you having lunch with X?"

Q520 Mr Bacon: "And what he told me about Sir Gus was-"

Sir Gus O'Donnell: Exactly. The ministerial code has the word "reasonable," which you rightly mentioned the first time. I think that is right.

Q521 Chair: The problem with this-I hope you would accept this-is that David Hartnett’s position is very different from that of other people, other Ministers and other permanent secretaries, because the decisions he takes are shrouded in secrecy. Do you think it is appropriate that he has these regular lunches-not necessarily with individual taxpayers, and even I went through the list-we all know that the big corporates do deals either through lawyers or through tax advisers-but with those lawyers and tax advisers, when he, in this secret way, is charged with going off and protecting the taxpayer’s interest and doing a deal?

Sir Gus O'Donnell: You have to get a particular balance in these cases, because it is important that the person who is doing these deals has a relationship and sorts out with them how to manage getting the billions in. It is important, I think, that that relationship should be absolutely transparent. If you have those two things, they are the most important things. I would certainly say that I would not expect Dave to be taking any lavish hospitality.

Q522 Chair: Well, 107 lunches is quite a lot. What sticks in my gullet is that I have a lot of people in my constituency who get tax credit. I probably have more who get tax credit than many other constituencies. Every week, my surgery is full of people who come in absolutely desperate-these are poor, poor people-because, usually, there was a mistake by HMRC or because they made a genuine error and didn’t give a bit of information to HMRC about a change of circumstance. They are then lumbered with a debt which, if they carry on taking tax credit, is taken off them week by week. These are poor people living on the edge, and it feels so wrong that nobody there thinks, "We want to get the best we can out of them. Let’s treat them humanely." But when you are talking about the Vodafones or the Goldman Sachses, we have got to have relationship, we have to come to a deal and it does not matter if £10 million goes missing. It is a completely different set of principles, which feels unequal in front of the law.

Sir Gus O'Donnell: I think you and I probably share, although we would have to keep it quite quiet, a strong desire to help the most disadvantaged and the poorest in society. I completely agree with you that I would be very much on the side of trying to sort out policy decisions that ensured that when we were dealing with groups that had dynamic changes to their income at low levels we had a better way of managing that.

Q523 Mr Bacon: The getting of a relationship seems to be something that privileged groups such as Goldman Sachs and Vodafone find easier and ordinary taxpayers find more difficult-

Sir Gus O'Donnell: No. To be fair, it is very hard to get at the most disadvantaged groups, so we work very hard with the people who represent them, citizens advice bureaux for example, to understand the nature-

Q524 Mr Bacon: We’re talking at slightly cross-purposes. I’m talking about people who are paying tax, know that they have obligations to pay tax, and are having or trying to have a conversation with HMRC.

An accountant came to visit me in my surgery the week before last. He does the books and the tax for a lot of small businesses in the east of England, and he came to see me because in just the past six months he had noticed a perceptible change in the pressure that HMRC was applying to his small business clients. One of them was a company that owed £11,000 in VAT and was trying to get a time-to-pay arrangement. HMRC wouldn’t help-there were reasons for that-so in the end he just started paying £1,500 per week because it was not in dispute that he owed the money. The sum of £1,500 per week settles £11,000 quite quickly, but instead of accepting that and agreeing that he could keep it up, HMRC just levied him a fine of £1,300. He is now sacking two of his three staff in order to meet the tax liability because he can’t do both.

I have another case-

Sir Gus O'Donnell: If I could just say on that case, remember that the time-to-pay arrangements were introduced-the advice from HMRC to Ministers suggested this-as a good way of helping SMEs. I think it’s fair to say that the programme has been taken up dramatically.

Q525 Mr Bacon: But in that particular case he wasn’t given time to pay, while Vodafone was given five years, even though it has a lot of cash on its balance sheet.

Sir Gus O'Donnell: But before that change, put forward with advice, there wouldn’t have been any of this, would there? There would have been a much stricter regime before the time-to-pay arrangements came in, which was an issue that we put forward under the previous Administration-the national economic council. That was a substantial help to SMEs, and it had not existed before.

Q526 Mr Bacon: I accept that if time to pay is available and is offered and agreed to, it is very helpful, but my point is that it is inconsistently applied. If you are Vodafone you have several billion pounds of cash on your balance sheet and you’re given five years to pay a liability, but if you’re a small business in my constituency you’re not, and you have to lay off staff to meet your liabilities.

Another case that this accountant drew to my attention and which, having checked with his clients, he gave me permission to mention, was of a business person who not only was having to fight with cancer but found, as she says in this letter: "In addition to my period of illness, we have had a number of clients go out of business owing us money, others who are paying but only what they can afford and others who have taken their work in house to try and save money." That is the context in which people are operating and, going back to my original point about developing a relationship with HMRC, she says: "When I rang the number on the letter to ask if I could speak to someone to explain our situation and come to some mutually acceptable solution, I was told that this was not possible."

On another case, Mr Hartnett, you know what CIS is-the construction industry scheme-but there are plenty of people in PAYE who don’t. This particular individual had paid his liabilities, and the rest of it was to be offset through the CIS, but when eventually the accountant chased PAYE because he couldn’t understand why his client was continuing to get these letters threatening distraint proceedings, PAYE said that it didn’t know what CIS was. When he talked to CIS, it said that that it didn’t know that it had to hand the information over to PAYE.

These are small businesses that are under huge pressure, and they do not seem to get the same kind of treatment. I appreciate that there is a quantum here-a bell curve. There are lots of small businesses and you can’t have the same frequency of discussion with a large number of people, but it feels very much as if small businesses are getting a much harder time of it, and big businesses are able to have a much more sensible conversation with you.

Dave Hartnett: The first thing I want to say, Mr Bacon, is that if you want to send me the cases I will happily have them looked at and will look at them personally as well. I would actually find that very helpful, because I was troubled by one or two things that you said to me. Given that CIS actually gets collected in part through the pay-as-you-earn system, it is an extraordinary idea that our people did not know. If that is right, I want to know all about it.

The second thing to say is that we have a developed strategy for small business that is one of support and guidance. I myself chaired a meeting with the software industry just the other day, to see whether a free app could be developed to help the bookkeeping of small business, and I think we are going to get there and that that will be helpful. Those cases will help me understand whether we have got tougher.

Q527 Chair: I hope you will take the same view of my poor constituents, who are having to struggle without tax credit.

Dave Hartnett: Of course.

Chair: They are as needy as a small business.

Sir Gus O'Donnell: You should be really pleased that, because of the money that we are getting in through some of the big things that Dave has done, there is less pressure on-

Chair: We don’t know how much money he has not got in-that’s the problem.

Sir Gus O'Donnell: I know that in the past, from places like Switzerland, we were getting zero. We are getting a lot more than zero, and it’s in very large numbers, so I am delighted with that. And I intend to say it again.

Q528 Austin Mitchell: I just want to make it clear that, in the eyes of my constituents, I am a very high taxpayer-a very high earner. My tax affairs are in their usual chaos and I am available for lunches on Tuesdays.

Dave Hartnett: We have a board meeting every Tuesday, so I can’t help you.

Q529 Austin Mitchell: Damn!

Dave Hartnett told us on the 12th that, in December, there was a meeting with Mr Inglese and he said that there were two entirely acceptable approaches: "one was to stay with the proposed settlement and one was to put it to one side." After much deep quarrying on oath, he agreed that he had not given a legal opinion as to which option you should take, but he expressed a personal view that you should not put it to one side. Why did you put it to one side?

Dave Hartnett: We didn’t.

Austin Mitchell: This is the interest payment.

Dave Hartnett: We followed through. If I have understood that correctly-I did not listen to Mr Inglese’s testimony-and if what you have said is right, Mr Mitchell, Mr Inglese gave two options. I think you just said that his personal view was that we should not set aside the settlement, but if I have misunderstood, can you tell me again?

Sir Gus O'Donnell: I.e., they shouldn’t reopen

Chair: It is what he said.

Q530 Stephen Barclay: As Austin has raised Mr Inglese’s evidence, can we come back to the chronology? As I understand it, Mr Inglese said that you first raised the error with him on 7 December, yet at our last hearing, in response to Richard, you indicated that you had told him on Monday 22 November.

Dave Hartnett: I think I said several things, Mr Barclay, in an attempt to be helpful. Would it be helpful if I set out the chronology?

Q531 Stephen Barclay: Yes, if you want to take us through it. To refresh your memory, Mr Bacon asked, "When did you speak to Mr Inglese?", and you replied, "I think on the Monday, but I need to check, Mr Bacon." "You think it was the 22nd, after the Friday." "Very soon after, yes."

Dave Hartnett: Okay. There was another passage when I also said perhaps it was the week later. The meeting with Goldmans was on 19 November. Over the weekend that followed, our banking sector lead became concerned that a mistake had been made in governance-it is really important that I stress "in governance." He concluded that the matter had to go through our high risk corporate governance process, and discussed the matter with his director, who agreed that that should happen. At the same time, I began to have a nagging doubt about the interest position.

Q532 Stephen Barclay: When you say "at the same time", you mean over the weekend?

Dave Hartnett: Over the end of that weekend.

Q533 Stephen Barclay: Was the banking sector lead at the meeting on the 19th?

Dave Hartnett: Yes, he was.

Q534 Stephen Barclay: So both of you were at the meeting, but neither of you spotted the error at the meeting?

Dave Hartnett: On the interest?

Stephen Barclay: On the 19th.

Dave Hartnett: No, not at all. In the week of the 22nd, I mentioned to Mr Inglese that I had settled-or we had settled, or whatever the right term is-one of his litigation cases.

Q535 Stephen Barclay: That was when, sorry?

Dave Hartnett: That was in the week of 22 November and I did not say more because, by then, this issue of the interest was going through the high risk corporate programme, which was our governance mechanism. I think it is matter of history now that the high risk corporate programme rejected the settlement.

The papers for the high risk corporate programme were prepared by the banking sector lead and the customer relationship manager responsible for Goldmans, and they brought out the interest issue. I was abroad on business the following week. I think Mr Bacon brought out all my movements, at the last hearing, around this time. I was abroad on business for the whole week, and I was informed while I was away that the high risk corporate programme had rejected the proposed settlement on adjustable options because of the interest issue.

On returning to the UK, I spoke to Mr Inglese on 7 December, and I asked for his advice as to what the options were in relation to the Goldmans interest issue, and he went on to give me the advice, as Mr Mitchell has described, that there were two options. Having gone back and looked it-I was trying to be helpful before.

Q536 Stephen Barclay: That is very helpful. There is a slight tension in what you are saying between, in the week commencing 22nd, saying that you notified Mr Inglese that you had settled his case, whilst at the same time saying that by then you had also identified a flaw in the settlement. Would it not be normal when referring to a litigation case with your general counsel, to say, "I have settled the case, but I’ve spotted a mistake"?

Dave Hartnett: I have no idea what would be normal, Mr Barclay. I mentioned it to Mr Inglese, and I was confident that this matter was going to be explored by the proper governance process.

Q537 Stephen Barclay: The point I am driving at is that you are saying you spotted the mistake over the weekend and yet the following week you are saying to general counsel, "We’ve settled it," but not telling him there is a mistake. It just seems inconsistent.

Dave Hartnett: Because I wanted to be sure-as I said to you, I had a nagging doubt. The high risk corporate programme board, with lawyers on it, went on to examine that issue on, I think, 30 November.

Q538 Stephen Barclay: So there were no lawyers, I think we established, at the meeting on the 19th?

Dave Hartnett: There were no lawyers for HMRC.

Q539 Stephen Barclay: So when the banking sector lead and you spotted a mistake, this was a mistake-

Dave Hartnett: There were different mistakes.

Stephen Barclay: These were two different mistakes?

Dave Hartnett: Yes. I have said that before.

Q540 Stephen Barclay: In terms of the file note, at both your last two meetings you said you hadn’t actually found the time to read it. I assume you have-

Dave Hartnett: It wasn’t a question of finding the time to read it, Mr Barclay; the issue was being managed by the banking sector lead and the customer relationship manager.

Q541 Stephen Barclay: I think, actually, you did say, "No, not yet, but I will do so" and "I have not yet had a chance to check", and this was at the second hearing.

Dave Hartnett: And I went and found it.

Q542 Stephen Barclay: So you have now read it. Sir Gus mentioned the importance of transparency. Was a note of this settlement meeting-a settlement meeting of such importance that you phoned in advance the head of global tax at Goldman Sachs, which is a very senior post, to fly over from New York-produced by HMRC?

Dave Hartnett: I don’t think so, because-

Q543 Stephen Barclay: You "don’t think". Haven’t you checked?

Dave Hartnett: Well, I haven’t found one, Mr Barclay. I have not searched for it; I have asked. But the important issue is this: what the team said to me is that the note from Goldmans about what had taken place came in very quickly-I’ve seen that note-and they found it an acceptable note of what had taken place.

Q544 Stephen Barclay: Is it reasonable to conclude, therefore-given that this is your third appearance on the same issue before the Committee-that if you have not to date found one, there was not a note produced?

Dave Hartnett: I don’t think HMRC produced a note of that meeting.

Q545 Stephen Barclay: Is it not odd, given the importance of transparency, emphasised by Sir Gus himself, that settlement meetings attended by yourself as a tax Commissioner are going ahead without a note being produced?

Dave Hartnett: That is because the team thought the Goldmans note, which came in very fast, was acceptable.

Q546 Austin Mitchell: After much correction, which colleagues might to comment on, you said the opposite-evidently-of what Mr Inglese told me. It is a virtue in politics to be deaf, but it is not a virtue on this Committee. Why did you not claim the interest? His opinion was that you could.

Dave Hartnett: Mr Inglese certainly said that. There is in our papers a full note of the decision that was made. I’m afraid that I am going where you hate me going: it is a taxpayer confidential issue. This is a very comprehensive note that covers a number of things. I don’t think I can go any further.

Q547 Chair: Have you seen it, Sir Gus?

Sir Gus O'Donnell: No. I try to keep out of individual taxpayer issues.

Q548 Chair: I will bring it to an end now, but it just seems that the whole saga-[Interruption.] Have you seen it?

Amyas Morse: Yes.

Q549 Chair: It just seems to me that this is a big advert for Goldman Sachs; they toughed it out and got let off interest. Don’t you feel that that is true? That’s what it feels like to me.

Dave Hartnett: One of the things that is really important to HMRC-and I hope this will happen-is that the NAO will come back with tax expertise and look at this.

Q550 Chair: You haven’t answered the question. What I am drawing this to is that the perception is that there has been huge reputational damage to HMRC. If I was in Goldman Sachs, I would be rubbing my hands and thinking, "God, we beat ’em to it! We got off the tax bill."

Sir Gus O'Donnell: I am actually going to defend the vampire squid here. I don’t think they would regard such an interpretation as being at all positive for their reputation.

Chair: What about HMRC’s reputation?

Q551 Fiona Mactaggart: Don’t they want to look like the tough guys, compared with all the other banks that folded and had to pay interest?

Sir Gus O'Donnell: No.

Q552 Fiona Mactaggart: I would have thought, if I was trying to be a hard-nosed deal banker, that that’s what corporates are looking for. Goldman Sachs have proved themselves to be the hardest-nosed deal bankers, because they have stuffed the British taxpayer out of I don’t know how many millions of pounds in interest.

Sir Gus O'Donnell: I think that there were some people some time ago who thought that that was a sensible place for financial services companies to be. When you heard Bob Diamond’s lecture, as opposed to his earlier evidence, you began to see people in the financial sector realising that "Yah-boo, we got one over on the taxman" is actually massively bad for their reputation, and not good. Goldmans would think that, as well.

Q553 Chair: Do you accept there’s reputational damage to HMRC?

Dave Hartnett: There is reputational damage to HMRC by what has been written in many quarters about this. I also think that, because of the information that has been leaked out of our organisation and gone out there, the story is seriously incomplete.

Q554 Chair: That is why we want better accountability.

Dave Hartnett: And that is why we welcome the NAO looking at this.

Q555 Chair: Finally, given the sort of coverage there has been over the Goldman Sachs deal and over the Vodafone deal, which we touched on this afternoon, have you considered your own position? Have you considered resigning, or do you feel that you still have the confidence of Parliament?

Dave Hartnett: I have thought very hard about both those issues. I have read just about everything that has been written about them. It is incomplete. I have work to do and I have no plans to resign.

Chair: Thank you.

Sir Gus O'Donnell: It needs to be put on the record yet again that whatever the circumstances of this case, I am extremely grateful to Dave for the work that he has done, particularly with regard to Switzerland and Liechtenstein, which will bring in billions of pounds for the taxpayer that we would not otherwise have got.

Chair: Thank you.