Treasury Committee - Minutes of EvidenceHC 1371 Closing the Tax Gap: HMRC’s record at ensuring tax compliance

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House of commons



Treasury Sub-Committee

Administration and effectiveness of HM Revenue and Customs: closing the tax gap

Wednesday 29 June 2011

Richard Murphy and Graham Black

Professor Judith Freedman and David Sproul

Evidence heard in Public Questions 1 - 108

Oral Evidence

Taken before the Treasury Sub-Committee Committee

on Wednesday 29 June 2011

Members present:

Mr George Mudie (Chair)

Mark Garnier

Jesse Norman

John Thurso

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Richard Murphy, Taxresearch LLP, and Graham Black, President, Association of Revenue and Customs, gave evidence.

Chair: I am sorry we are slightly light on members. If you push any sort of vote, Richard, I think you have a good chance of winning it, we are so short of members. But it is a strange time of year. Thank you for coming. Mr Tyrie is going to open up.

Q1 Mr Tyrie: I would like to take a look at the tax gap. Mr Murphy, you told us that a tax gap of £120 billion is proportionately where Mexico is, or you used a phrase like that. I don’t think we are Mexico. How do you respond to this?

Richard Murphy: I don’t think that does imply that we are Mexico. Remember, in that £120 billion there is £25 billion of late-paid tax and I always do make that distinction. That is the outstanding tax at any point in time. But the Revenue include it in their theoretical numbers, so I do as well. In terms of tax avoided and tax evaded the figure is £95 billion, and of that £70 billion is evasion and that is not at the level of Mexico. That is about the level of a lot of OECD countries.

If we were at the level that the Revenue put us at, which is roughly £35 billion for evasion, we would be the cleanest country in the world, possibly, bar Switzerland. Well, Switzerland does not evade its own tax, it just helps everybody else do it. But we certainly aren’t the cleanest country in the world, bar Switzerland-I am quite sure that is not true.

The Revenue’s figures suggest an evasion rate of around 7%. My suggestion is it is around 13%. That would tie in with the World Bank figures, for example, published in the last year. I think that is a reasonable estimate. It means that roughly £1 in £8 of the UK’s economy is in the black economy-I am afraid I suspect that is right. Of course, part of that is criminal, part of it is simply tax-evasion driven, but I think that is consistent with a European average of similar countries to ourselves.

Q2 Mr Tyrie: I have in front of me a pie chart derived from HMRC’s 2009 estimates of this. I am sure you know the one. If one starts to look at this carefully a large part of the tax gap seems to melt away, and I am just beginning to wonder whether this is a useful tool for working out how to estimate HMRC’s performance and behaviour.

Richard Murphy: I am afraid I don’t think the Revenue’s approach to this is a very useful tool. Remember, they have two completely different methodologies in calculating the tax gap. One is with regard to indirect taxes, which they have done for longer, and one is with regard to direct taxes, which they have only done virtually in response to the work that I did for the TUC in 2008.

The indirect taxes are done in an economically logical way. They look at the total economy, they estimate the amount of VAT and other taxes that they should collect as a result, compare that total number with the amount of tax that they actually collect and say, "That is the difference". That number, by the way, is around 13%, so that number seems to be completely logical.

When they come to estimating the direct tax gap, they work on what they call a bottom-up methodology, which is to work from the tax returns that they get, find out the error rate in it and extrapolate it. The difficulty is that we are talking about tax evasion in large part here. Remember, tax evasion is much more significant than tax avoidance, and then I would have a different understanding of tax avoidance as well. But with regard to tax evasion the bit that they miss out and which is very obvious from their figure, is the fact that large numbers of people who are tax evading will never be in the system and will never send in a tax return. Therefore that is just missed from their data. So, they end up with a figure for moonlighting, for example, which is around £1 billion. Well, that is just crazily small. To believe that there is only £1 billion lost because of cash-in-hand, moonlighting labour in the UK is to be living, frankly, a fantasy. I just don’t think that is true.

So, the methodology that is being used in that approach is wrong. I believe the Revenue should be using a top-down approach to estimate the loss of revenue on direct taxes just as they are with regard to indirect taxes and I have never seen a justification as to why they have chosen one method for direct and another for indirect. The two are fundamentally different, and yet they then add them together and say that is the combined total.

Q3 Mr Tyrie: Looking at it from a managerial perspective in HMRC it must follow from what you say that using the tax gap as a raw measure of success or failure is also going to distort the way you run your operation.

Richard Murphy: I think it has a significant impact. Looking at the work that I did that was published in March this year based upon answers from Parliamentary Questions, which Caroline Lucas and I worked on, I looked at the tax gap with regard to small companies and the fact that 500,000 companies are struck off a year in the UK. The Revenue don’t raise objections to almost any of those cases, because they don’t have a focus upon that form of evasion, and yet I am quite sure there is a vast amount of evasion there.

One in three corporate tax returns that are sent out by the Revenue a year are not returned. That is 600,000 of the 1.8 million tax returns they sent out for 2009-2010 were not returned to them and they basically have done nothing about it. The point about that is that that is because the management focus is upon the returns they get, which is the basis of the estimates that they are publishing. They are not putting an estimate upon the returns that they don’t get.

Q4 Mr Tyrie: Mr Black, is there anything you want to add to the significant exchange I think we have had on-

Graham Black: I think probably HMRC are perfectly capable of responding on the specifics of how they calculate the tax gap in terms of the specific issues that Richard mentioned. The truth is we know that measuring the tax gap is very difficult. A lot of countries find it too difficult and don’t try at all. We have an estimate. We have a range of estimates. The HMRC one is the one that we tend to use when looking at things. It may be slightly conservative. The truth is once you get to a tax gap of £40 billion, £50 billion, £60 billion, I think our focus is on what we do about it rather than measuring it. Does it make any difference whether it is £60 billion or £70 billion? There is clearly money out there that should be coming into the Exchequer and it it’s not.

While that is difficult to measure, the impact of what we do we can measure. We can identify what additional funds we bring into the Exchequer from our activity and that is a reasonable measure of what HMRC is doing. So it is about how many angels can you get on the head of a pin to some extent. We know it is a very big figure, we know the money is out there. I suppose I am more concerned about what we are doing to bring it in.

Q5 Mark Garnier: HMRC is claiming that, if it achieves its target to raise an extra £7 billion a year through the compliance, the intervention yield by 2015 will be nearly three times that amount. We will start with you, Mr Murphy. Do you think that is achievable?

Richard Murphy: I believe the Revenue could achieve a lot more than that. I think that is a too modest target, but that is because I believe that the target that they are aiming at is bigger than the Revenue admit.

I think that the resources being allocated to achieving that result are also too modest. I think that if only the Revenue were willing to invest more heavily, then a significantly greater sum could be achieved. For example, I have identified some ways in which that could be done. This work I have done on small businesses was deliberately undertaken to see if there was a market there that could be addressed when there was clearly money to be captured, which at the moment isn't being thought about.

Q6 Mark Garnier: Mr Black, what do you think? You have obviously argued that there is a cut in funding to HMRC and that that is the wrong approach. Do you still stand by that and agree that if you were investing a lot more into the resources you will narrow the tax gap quicker?

Graham Black: I think you can certainly make more of an inroad into the tax gap. The £7 billion is a stretching target. We know roughly where it is aimed at. I don’t think we have a huge amount of detail as to exactly how it has been calculated. We know the areas that the £7 billion comes from, but I am not too sure for example how much of that is deterrent effect rather than cash-to-bank that we traditionally measure. Clearly, it is a very stretching target, particularly when you are aiming at the mass market, often small/medium-sized businesses. You have to do an awful lot of work on an awful lot of businesses to bring in £7 billion. I think it is achievable but it is a stretch and I think it will be a difficult target to achieve, bearing in mind the other pressures HMRC is under. However, I think there are other areas-the reinvestment that is bringing in that £7 billion-it is not hitting. There are significant areas of the tax gap that are likely to get worse while improving in others. So I think there is a bit of an opportunity missed, I suppose is how we see it.

Q7 Mark Garnier: Do you think they are aiming at the right target with SMEs? I appreciate that something like 50% of this problem is derived from SMEs but as you have just said, Mr Murphy, something like 30% of corporate tax returns are not completed and sent back and they do not seem to be bothering, and you have so many SMEs, do you think it is too difficult to be able to tackle the tax gap through the SMEs?

Richard Murphy: No, I don’t, because I think that this issue has to be thought about a lot more systemically and in relation to specific legislation to ensure that the right data is available and access to the data is available to HMRC. For example, HMRC is not getting information on which companies in the UK have bank accounts or not. If it knew which companies had a bank account automatically, it would know which companies were likely to have a tax liability. If a company does not have a bank account it is highly likely to be dormant and the Revenue can safely ignore it. Therefore, on risk assessment terms alone, resources can be targeted at the right companies. If in those 500,000 companies that were struck off in 2009/2010 there were a high proportion who had bank accounts and never filed accounts, or who even had bank accounts at the time of the striking off, and I suspect we will find there were quite a lot of those-that is my suspicion, I can’t prove it but neither can the Revenue-then we would be in a position to be able to target resources on the right companies.

If then there were a right of the Revenue to demand information and when it wasn’t supplied there was the right to go to the bank and say, "Please tell us who, under anti-money laundering regulation, you have recorded as being the beneficial owners of this company and the directors of this company, so we may make direct contact with them in a personal capacity to demand the information" we would be transforming the way in which information could be handled and managed by the Revenue to target resources against the SME community, some of whom of course are completely honest, upright and playing completely fairly, as we would wish, and those people who are being honest and upright are being undermined by this community who I am sure are evading through the weakness in our current administration system. So, it is about a combination of intelligent legislation to ensure the Revenue have the right tools and the right resources within the Revenue to follow that up. It is not one thing, it is a systemic approach.

Q8 Mark Garnier: You make a very good point, which is that there are a great many people out there who are very fine, upstanding either businesses or members of the community. Do you think that this kind of general approach from HMRC in order to try and tackle the tax gap may start alienating certain members of the community that otherwise should not be alienated?

Graham Black: Maybe I can answer that. I hope not. I think when looking at what the Department is aiming to do, some of it is a recognition that it has cut too far and too deeply in some of these areas in dealing with evasion. Evasion is a big part of the tax gap and there is a big behavioural impact if we don’t tackle it. If we don’t tackle evasion then everyone will see that and it will increase as a problem, so it certainly was right to be putting more people on to it. I think the Department has improved the way in which it can identify evasion. I think Richard is no doubt right that there are further tools that we can develop, but a lot of what the Department has done over the last few years is improving its use of IT to identify where the risks are. Therefore, you would like to think that its ability to identify the people that we need to look at will have improved. I think that has certainly proved the case. What we have to avoid is sending out blanket investigation to people who are clearly innocent and worrying them. That is clearly not what the Department wants to do. That could have the impact of alienating people, and I certainly think that the aim of the campaigns and the different approaches that HMRC is trying is designed to avoid that and make sure that we focus on the people where we have a good suspicion that there has been some wrong-doing.

Q9 Mark Garnier: You mentioned the relationship between evasion and avoidance. Mr Murphy, this is probably a question for you. The analysis suggests that the far greater part of the tax gap is accounted for by evasion and criminal activity, and yet there seems to be an awful lot of focus on tax avoidance in order to try and deal with the tax gap. Do you think this is a misallocation of resources?

Richard Murphy: It depends on for what purpose you are asking about that allocation of resources. We can’t remove this from a political context. Tax is inherently political. In the sense that we are trying to change sentiment about tax, so that people pay their tax, then it is appropriate to bring the issue to the public’s attention by using high-profile cases of avoidance where people will recognise the issue. In the sense that the greater sum of money is evasion, and without a doubt that is true, the on-the-ground work is quite probably going to focus more heavily upon evasion than it is upon avoidance. I don’t see that there is a dichotomy between the two. Changing the environment, the culture of tax, so that people believe that compliance is the right objective and that they should be trying to comply, is an important part of the messaging of this whole issue. That does very much depend upon grabbing headlines, and avoidance does do that whereas evasion doesn’t. The Revenue issue loads of press releases saying, "A fish and chip shop owner from so-and-so has been prosecuted". It doesn’t get very much press outside of the local town where it happens. But if you have a big-name company it is very different.

Q10 Mark Garnier: You talk about the fact that we need to encourage people to be compliant with the tax rules. Do you think the tax rules are just fundamentally too complex for people easily to be compliant with them?

Richard Murphy: No, is my simple answer. Of course they are complex, but then so is life complex and modern business is extremely complex. As an accountant I have sat down and been responsible for preparing thousands of pages of documentation for business deals. I have seen the documentation put out by my own Institute of Chartered Accountants to regulate my behaviour as a Chartered Accountant. It is long, it is complex and it seems that the private sector is just as capable of producing lots and lots of complexity and regulation as the State is and it has been growing at the same proportionate amount, as far as I can see. My Members’ Handbook in 1980 was that thick, and as people say, "Tolley’s has grown", well, so has the Institute of Chartered Accountants Members’ Handbook and so have the Accounting Rules. This is the nature of modern life, it is complex. Do I think it is beyond comprehension? No, as a practising accountant-and I have been a practising accountant, I don’t do as much now as I used to-I never found I got to the point where it was completely incomprehensible or I couldn't if necessary go and ask somebody-if necessary, counsel-to interpret it, but there is a cost.

Q11 Mark Garnier: For the average SME owner who is trying to make widgets and not necessarily comply with this, it means they are going to have to spend quite a lot of money on getting extremely well-qualified people like you to come and do their work for them.

Richard Murphy: I think that in the modern environment of professional service, a good SME owner who is interested in making sure that they comply and focus upon being compliant, leaving them to get on with the important task of making money, which is much more important in terms of their net wellbeing, they can afford to enter into a deal with a good chartered accountant, which is probably on a fixed price that includes unlimited phone calls for advice when they run across a problem. Those are available. A business that is really intent on being compliant, because that lets them get on with the business of making money, can afford to do that. I don’t see that as a problem and that is my belief, having been in practice and serving 800 clients until a little while ago.

Graham Black: Can I just touch on one important aspect of Mr Garnier’s question? I think, in terms of the avoidance and evasion, we have to tackle both. We have to tackle both for the reason that there is a large amount of money at stake. The tax gap in avoidance is huge, as is the one in evasion. So the money is out there, the country needs the money so we have to tackle both. We are probably seriously tackling the evasion side with the £900 million reinvestment but we are not tackling the avoidance as much as we could do, and there is a significant capacity for us to get more there. On whether the tax system is more complex-and we certainly didn't want Richard and I to sit here and disagree with each other-he said "no", I say "yes". I think it is increasingly difficult with the wealth of rules around employment taxes, around VAT, around Income Tax and Corporation Tax. It is very difficult. Not only is it difficult for businesses who are concentrating on running their businesses, I think it is also very difficult for local accountants who have to help the businesses. I think one of the areas we have not really done what we need to in HMRC is that we need to help those local accountants to be able to get their taxpayers’ affairs right.

Q12 Mark Garnier: Sorry, I am going on a bit. You talk about the people who have to pay the tax. What about the people who collect it? What about your members? Do they find it quite complex, trying to apply the rules?

Graham Black: They do find it complex, and quite often of course our members will deal with one particular tax and a business will have to deal with all the taxes, so it is very difficult. If you look at the amount of statutes, Richard is right, it is a complex world. There are a lot of financial transactions now that weren’t about 20 years ago. On the other hand, I have to say, at the end of the day, HMRC’s job is to implement and carry through the legislation that Parliament passes, so it is not necessarily the case that HMRC is doing these things. I am not willing to pass things back to the other side of the table, but at the end of the day the laws are passed by Parliament and HMRC is there to ensure that those laws are conformed with.

Richard Murphy: If I might, can I come back on the point that Graham has made? I think it is very important that HMRC has sufficient capacity to invest in its staff to make sure that they are able to answer the questions. I have just waited six months to get a reply to a technical question from the Revenue. It was a reasonable request that I made, I think, and it took a long time to get an answer because they had to go all over the place until they could find somebody who could answer a reasonable question about a person’s affairs. That was too long. It was because there weren’t sufficient trained people in that particular area to deal with the question. I am worried that that is the result of too many staff leaving the Revenue, with too much experience that is now going to waste in this sense. That does worry me, and in that area I think there is a deficiency where the Revenue can’t support local accountants to ensure that their clients get the answers they need.

Q13 Chair: Can I ask Graham to set some parameters? When I first heard the Budget, maybe even the Spending Review, when we got the figure of £900 million is being put back, I assumed it was £900 million a year and I thought that was considerable. All Governments do this; they write it in a form that they can read anything they like in it. It is £917 million over the four-year period?

Graham Black: It is.

Q14 Chair: Has it been broken down yet into years?

Graham Black: I think it has. I don’t have the figures in front of me. I am sure HMRC can calculate those.

Q15 Chair: Can you get that for us?

Graham Black: Yes, I will request it, and I certainly think we now have a clearer picture of what that means in terms of staffing over the four years-

Chair: We are coming to that. That will be good.

Graham Black: -so I think the plans are there. That is in the context of I think £917 million reinvested and the overall cuts over the period are about £3 billion.

Q16 Chair: That is your good trade union hat getting on that. Staying on the amount of money going in, on the other side, it says £7 billion a year by 2014/2015. What the hell does that mean? What does it mean for 2011/2012, 2012/2013, 2013/2014, and what does it mean in 2014/2015? £7 billion: is that an accumulation or is that the platform we will build on?

Graham Black: I imagine HMRC has a more detailed breakdown of the figures, but my understanding is that it thinks, by the end of the period, there will be an additional £7 billion in that year, and it will ramp up towards that over the four-year period. So, I think the overall total-again, I may be wrong-may be about £16 billion or so over the income period.

Q17 Chair: Graham, your members are the top brass, with notable exceptions, in HMRC, so you must know what the target is for this year because we have lost a quarter already. So what is the target for this year?

Graham Black: I don’t have that in front of me. Certainly I have not seen anything to suggest that they are falling behind any of the targets at the moment, but I haven’t seen–

Q18 Chair: How would you know you were falling behind the target if you don’t know what the target is?

Graham Black: I think if they were behind the target they would probably have been letting staff know that we had to do more in order to achieve it, but I really don’t have that in front of me here.

Q19 Chair: Let me go back to last year. I keep seeing these figures about how successful you have been in terms of bringing brass in. How do you know?

Graham Black: We know because if we take a case of evasion we can measure the amount of tax that comes in at the end of the inquiry. If we do an inquiry into a technical issue, or an avoidance scheme, we have a clear measure of how much additional tax we bring in. So I think those are pretty hard and fast figures. They are not estimates. They are not plucked out of the air. Those are quite hard figures. I think it gets more difficult when you start looking at things like the deterrence impact of what we do. If we have a look at evasion, how many people are put off evading because they see that we are actually serious? That is always going to be a very difficult figure.

Q20 Chair: You are the trade union official and you don’t know how much money has been allocated for additional staff. Do you know how many additional staff have been appointed? I don’t mean fresh adverts, and so on, but moved across.

Graham Black: I think they are trying to balance moving staff out of areas like Pay As You Earn, where there has been a lot of pressure on the Department, with the need to move them into enforcement and compliance areas where they will be getting in the additional tax. I don’t think anyone envisaged that happening on day one, but some moves have already started happening. I think they have a plan in place over the rest of this year, and over the years ahead, of moving people-once they have stabilised Pay As You Earn-out of that area and into the areas of evasion that they are investigating.

Q21 Chair: You may have answered this in the debate that has been going on, but we have their statement about how they expect to raise this £7 billion. There is £4 billion from SMEs. There is £1 billion clamping down on large businesses; £1 billion taking on organised crime-I don't know if that is the same as the one before, but never mind-and there is £1 billion improved debt collections. Are those the areas? That is the totality of it?

Graham Black: That is the totality of the reinvestment package and where we are intending to be bringing in the additional funds, on top of the baseline of what we do at the moment. So I think that is the additional money that is going to come in. Those are the areas where they are intending to use the reinvestment, so you would anticipate there will be more money coming in from our normal day-to-day activities.

Q22 Chair: I presume they have chosen this because largely this is where it will bring in, well, £7 billion, but it will bring in a lot of money.

Graham Black: It clearly will bring in a lot of money-

Q23 Chair: But do both of you agree with the priority areas as set out? They have this additional money, we think. They are putting staff on, we think, and they are going to try and raise this money. How much this year we don’t know. But would you have chosen these four areas? I am not asking you to prioritise these four, but what is missing, if anything?

Graham Black: There are a couple of very significant areas missing that I can allude to. I think the amount involved in putting money into avoidance is fairly limited and the reinvestment in large business is largely around training, it is not about putting extra staff on. We are going to be cutting the staff that are going looking at large businesses, multinationals, international transactions. That is where the very largest amount of avoidance takes place. That is where we get the biggest bang for our bucks. We get the most return from our compliance activity when we are looking at large businesses, multinational transactions, and cross-border transactions. It seems to me very odd that when we are reinvesting to get more money in that is an area where we really are not putting more resources. We are actually reducing the resources over the next four years. So that would be the big gap.

But there are other areas, such as the hidden economy, where I think again we have missed a bit of an opportunity. The third area in the tax gap, 15% of the tax gap is what is referred to as legal. It is a complex tax world and we have disagreements about how things should be taxed. You need tax professionals to argue those cases. At the moment that resource is being squeezed out, so we do not have anyone who is looking at those difficult, technical areas and again a lot of money is going missing. So there are significant gaps in the programme, but I do agree that every area that they have identified does need activity and does need additional resource.

Q24 Chair: Yes. But as a country we need money badly, don’t we?

Graham Black: Yes.

Q25 Chair: If you took the £1 billion from debt collection, which on evidence seems to be scaring old ladies and pensioners, and put it in some other areas would it raise more money?

Graham Black: Yes. We could easily. The truth is that I think we have demonstrated, time and time again, that there are plenty of areas where we get an even better return than the areas identified.

Q26 Chair: Right, Richard, you can answer-why then have they put these on the table?

Richard Murphy: Because they are easy.

Chair: Because they are-

Richard Murphy: Easy. Because when you are management tasked to do a job and apparently you have to come up with some numbers, of course you choose those that you are most likely to be able to fulfil. The SME sector is an obvious target. My concern is that there is only £1 billion there for illegal activity. My belief is that we will, as you suggested, have the honest business targeted or even the relatively honest business, but which is least within the system, is operating PAYE, is charging VAT and so on, but which is going to make some marginal errors. Yes, there will be companies which make marginal errors, of course there will be, who are going to be targeted heavily to try and recover that money because they are there on somebody’s desk and there isn’t going to be the effort put in to try to find those who are simply not there. The glaringly obvious, that we have an enormous amount of activity going on in the UK with regard to counterfeit goods, and yet we are not seeing Revenue officers turning up at every car boot sale on a Sunday morning and taking pictures of the number plates of people who are selling cigarettes at these locations. Why aren’t they? You know the sort of activity: some very basic, old style Customs and Excise policing style activity, which is a little bit heavy handed perhaps but which is appropriate for the sort of activity that they are targeting, is not being put forward as a major component in this package. I think some of that is necessary, and as I say I think some very sensible targeting of fraud, which I am quite sure is commonplace through limited companies, for example, in this country, is not in that package; the ones who are just not making the returns. So the emphasis is going to be upon trying to get a bit more out of those returns that go in, and again on the easier ones, because if you are transferring people, for example, PAYE compliance officers, to a recovery investigations office, they are different skill sets. The two do require quite different people to do them. I think Graham will probably agree. I suspect you will agree.

Graham Black: Not necessarily having different people but certainly people who will have to be retrained.

Richard Murphy: Retrained significantly to do a different style of work, to make sure that they understand accounting in a way that may not be required for PAYE, which is a regulation-based system, to ask the right sort of questions, to pursue the right sort of avenues of inquiry. I don’t believe that is easy and I think that those things are not being pursued, and that is why I would quite candidly suggest that that number is not bold enough and it is the easy number to pick up.

Q27 Chair: Okay, just a last question before I hand you over to John Thurso. Graham, it does seem to me important, in terms of scrutinising their accountability to us, to determine what they did last year in terms of this business, and you said, "Oh they are bringing money in all the time" and so on. Do we have an agreed figure for last year because I presume last year will continue and anything that is above last year will be the first tranche of this and, as they have said we are going to put £7 billion on the table in four years, we need to know where the hell they are starting from, don’t we? Do we?

Graham Black: Yes, we have figures. Again, the Department can send them to you I am sure. It is between £12 billion and £13 billion. I think that is the baseline figure. So the £7 billion will be on top of that, bringing it up to about £20 billion a year at the end of the period and that is what they are planning.

Q28 John Thurso: I wanted to ask about the High Risk Corporate Programme, but can I just follow on from something that has already been raised, which is about people in compliance; having enough qualified people to do the job? Graham, in your note to us, you note compliance activity will remain under severe pressure and you have insufficient legal resources, increasing privatisation on larger cases and reductions in coverage of some customer segments. But what about actual officers or members of staff with the capability to undertake the kind of work that is required by compliance? Do you think that there are enough? Are we losing people through redundancy programmes who we ought to be keeping? Do we have to recruit?

Graham Black: We certainly don’t have enough and we haven’t been recruiting as many as we should. Losing people? Yes, we do lose people through retirement; I have to say not redundancy as yet. The Department has done very well in trying to avoid compulsory redundancies. The fact is that-

Q29 John Thurso: We all know a compulsory redundancy is only voluntary when you are told you have no option, and if you don’t sign up by tomorrow your package is half the size it would be if it is voluntary.

Graham Black: Yes, and we have a fear that that is where we are going to be over the next four years because over the next four years we are going to lose people at senior grades. I think I said about 400; over 400 that we are going to be losing. That is a lot of people. These are our top notch professionals across HMRC. That is a lot of people to be losing out of key areas. So we are under pressure. You cannot conjure these people out of the air at the flick of a switch. It does take a lot of training. These are key professionals. They have skills that they can use for outside firms as well as for HMRC so there is a market out there for them as well.

Q30 John Thurso: My reason for asking you about this is my well known interest in a particular tax office that, because Retford isn’t near, I won’t name. I was originally told it was the cost of the property that was the problem. We then came up with a plan that suggested that the people there who were in compliance might be able to work remotely. Recently, as in about two or three weeks ago, the staff were told, "We don’t need any more compliance people. Your jobs are not needed"-to more or less go ahead and be voluntarily redundant. This seems to me from all the evidence that I have seen in this Committee to be wholly counterintuitive. Am I right or wrong in thinking that? Anybody who wants to support me please-

Graham Black: I would say it is counterintuitive. I can understand long-term plans. The Department has been under pressure with finances, so to reduce the estate and have a smaller number of presences around the country makes sense. There are parts of the country where that means that we withdraw our presence entirely and have to have people travelling a long way to do any compliance activity, and you have a deterrence impact if you don’t have a local office. So I think there are sound arguments both ways. You have to look at it on a case-by-case basis, and I don’t think you can say every small town in the whole country would, but there are strong arguments for it.

Q31 John Thurso: No, but if you had 10 or 15 high class compliance officers who could work remotely in premises supplied by another agency, that should be quite a useful human resource to keep for say three or four years.

Graham Black: In the context of a very stretched Spending Review period where we have to get a lot of money in, where we have trained staff who are capable of doing the job, to start retraining other staff elsewhere, it would not be my first port of call if I was asked, yes.

John Thurso: That will do me.

Richard Murphy: If I could just add, your logic seems completely sound to the entire tax profession that I speak to. Whether they are accountants on the ground, whether they are tax specialists, everybody knows that we cannot get the response that we want, because the people that we would like to talk to are not there; are being relocated, and so on. There is a universal demand outside the Revenue for there to be more Revenue staff to be able to undertake the jobs to help people to get their tax affairs right. The only people who seem to think that it is logical to cut staff in the Revenue at the moment are the senior management of the Revenue. It is very hard for anybody else to understand what that logic is, especially when as a country we are desperately short of tax.

Graham Black: If we have two offices, perhaps an ex-Customs and an ex-Revenue office in the same town, everyone can see the logic of closing one of those buildings. To pluck an example out of the air, when you get somewhere like Wyke, for example-

John Thurso: Oh gosh, never thought of that.

Graham Black: -which covers quite a broad geographic area, I think there are some other issues that have to be taken into account there. I think all we need is a balanced view as to what the right thing is for the Department, bearing in mind the costs of actually getting an office like that.

Q32 John Thurso: Funnily enough-and I am digressing hugely-I completely accept the model that says that a tax office per town is not a workable option for the future, but it seems to me that where you have a human resource that is specialised in something, for example, like a film partnership, has that knowledge, and if there is any way of taking the fixed cost out of what they are doing by remote working, then it is daft to drop that and then find you don’t have the people who can do it. That is my own thrust on the argument.

Graham Black: There is a balance between that and perhaps working together in larger teams, which I think the business would take. You have to get the balance right. There is no black and white answer on these things and every case should be looked at, but I think there are certainly strong arguments in some remoter parts in the country.

Q33 John Thurso: Graham, can I come back to you on a different matter, which is the High Risk Corporate Programme, which has its critics and its supporters. What are the advantages and disadvantages, and on balance is it working?

Graham Black: On balance it is working and the advantages are that it gets through things quicker. These can be very complicated cases, and there has been in the past a number of open issues, very technical, very legal and they can drag on for many years. I think the High Risk Corporate Programme brings together a team, involving inspectors, accountants, lawyers, all of whom are concentrating on settling and getting the right answer on a particular taxpayer in a short period of time. Working with the taxpayer in that timetable but making sure that it is moved forward very quickly. So I have spoken to a lot of teams who do HRCP work. They are very committed. By far the majority of cases, they come out the other end of it thinking it has been a very effective way of working and it has brought in the right amount of money to the Exchequer. So overall, I am not saying it works in every case and that we don’t have issues or problems around some of the edges but I think you have to get in the context of something that is probably working overall.

Q34 John Thurso: Two criticisms that have come in and they are at opposite ends. One is that tax inspectors don’t like it because it is a board-to-board contact-it cuts them out-and at the other end, the public who say this is sweetheart deals being done to shift it off the books. Is the reality that it is halfway between the two and working, or is there some merit in either of those accusations?

Graham Black: I think when you are looking at a high risk corporate, you probably have a multinational that has been engaged in some fairly aggressive avoidance normally, and what you are doing here is you are dealing with the technical issues. There are technical people trying to make sure that we get the right answer on the tax issues, but there will be board-to-board contact because the idea is that not only do we get the right answer but we discourage the company from engaging in that sort of aggressive behaviour. So there has to be something more than simply the technical issues being answered, you want to change the behaviour. As to how much that has succeeded, I think the jury is out on whether we have changed the behaviour on any of these major corporates, but it is certainly working well at bringing money in and getting to the right conclusion quickly. So that is certainly the case.

The sweetheart deals; I can’t talk about individual taxpayer cases. I haven’t seen anything that is untoward in any case in the Department, but what I can say is that it is not only important that we do the right things but there has to be public confidence that we are doing it in the right way as well. I know the NAO is currently finalising a report about the way in which we settle large cases. I think there is something about clarity around the governance on big cases, to make sure that not only the taxpaying public but companies and people in HMRC all have complete confidence that that governance is being followed through. I think it is but at the moment there is not enough clarity around that, and we have to get-

Q35 John Thurso: That is the critical point. We have had exchanges earlier in this inquiry with David Gauke and, from memory, with Dave Hartnett, basically saying-I think, based around Vodafone, which was being publicised at that time-how do we know this is the right thing, and of course a Minister can’t get into individuals. You can’t have Ministers deciding what your tax is. But where you have a very high profile and, therefore, political case with the potential for a political dimension to it, how do we assure ourselves that the right decision has been made? Have you any suggestion as to how the governance could be on that, which does not involve politicians too much but does ensure that we can be reassured?

Graham Black: We are almost there. I think we have improved the governance in these larger cases significantly. I think the difficulties come when there are very large cases and we can start getting board members involved in the cases, perhaps at an earlier stage. I think it is absolutely vital if we have a really major settlement that, effectively, it should end up with the Commissioners looking at whether we should litigate or settle. But that should be a final decision. If we manage to just leave it to the professionals on the ground to deal with the technical issues and eventually put that forward to people at the highest level through a proper governance system, I think there is no lack of clarity there. There is no possibility of people thinking that any influence has been brought to bear. I don’t think influence has been brought to bear in any of these cases, but at least then people would be absolutely sure that the first time it was being considered by people at that level was when they see all the facts and it was a decision as to whether we should litigate or not. I think it is a question of getting that last bit of the governance in place and we can satisfy taxpayers and, I think, members of HMRC that everything is as we want it.

John Thurso: Anything to add to that, Richard?

Richard Murphy: I am not convinced that there has not been political influence brought to bear, or that there was not at least some willingness to look at the political consequences of some decisions, and Vodafone is a perfect example. The chance that that was settled a week before George Osborne was in India promoting Vodafone seems to me to be odd. The timings were unusual. I can’t prove anything from them. Circumstantially, they were strange.

Q36 John Thurso: That is a quite a chunky little grenade to chuck out that George Osborne went out-

Richard Murphy: It was an extraordinary circumstance that, one week before the Chancellor was in India talking about Vodafone and promoting their activities in that country, their tax affairs were settled in the UK. There may be absolutely no coincidence whatsoever, but you can see the possibility for misinterpretation as a result. Was that well managed from a public relations point of view? Clearly not, because it is possible to come to that conclusion from that chain of events; that is the point I am making. Therefore, in that circumstance, it is not clear that there was a process that went on that was as transparent as it could have been to satisfy the public that the right amount of tax was being paid particularly when, which is undoubtedly true, Vodafone had budgeted for a bigger settlement. Whether the settlement was for the right sum or not, I don’t know, nor does any commentator who has commented on the subject because none of us have been privy to the information. All we know is that the company provided for a bigger sum and that is surprising, but those coincidences are strange.

Q37 John Thurso: Most PLCs, in providing for a contingent liability for tax, will over provide because the one thing you never want to do is go back a second year running with your results and say, "Look, you know that X-billion we provided for, frightfully sorry O shareholders but it is double that". You want to do it the other way round.

Richard Murphy: Looking at the PLC accounts, on average there are adjustments of previously declared liabilities downwards. Yes, in 80% of cases the adjustment is downwards, not all, but in 80% of cases the adjustment is downwards, and they are required to disclose their adjustments to prior year liabilities. That does mean then that there does need to be a better procedure for ensuring that the management of these cases is transparent and there can be confidence in the board of the Revenue in doing so. I think one of the weaknesses in the system, at the present time, is that too much attention is being focused upon one particular member of the board. I am not questioning Dave Hartnett’s honesty in any way at all, but there has been too much emphasis given to one particular member, and that is partly because he is very unusual in being somebody who has worked in the Revenue through his career.

There is, in my opinion, a lack of expertise of tax trained people on the board of HMRC. That does mean that there is potentially an over-dependence on a particular expertise on its board, which may be inappropriate. I think there should be more representation of properly trained people, plus a clearer role for the nonexecutive directors, most of whom are very anonymous and whose appointment process is not clear and transparent, as far as I can see, to make sure that they are saying, "We have been involved in reviewing these cases". They don’t have to disclose any detail. All they have to make clear is that they have had a role in reviewing these activities. That would increase the confidence that there was a genuine review process on these high profile cases going on.

Q38 John Thurso: So the message is that it is a 50% probability in either direction. It may well have been that this was a coincidence; it may well have been that it was not. The problem is that there is a perception and that has to be dealt with. Therefore, there needs to be a more robust procedure for these big ticket cases to ensure that the perception of there might have been something somewhere simply can’t exist. That is basically what you are saying?

Richard Murphy: Yes. Can I come back to another point that you did make? One is I do not think that there has been a change in behaviour on the part of large corporates. There is no evidence of a change in behaviour as a result of this that I have seen anywhere, and secondly-

John Thurso: That would surprise me if there was, I would have to say.

Richard Murphy: In that sense, this policy is not working as far as I can see. There is no clear indication that there has been any change in behaviour, despite some attempts of investment on the Revenue’s part in it; and secondly, I think that we are not going to see a change in behaviour because of the change in direction of corporation tax in the UK, when we are going to be retreating from the whole world back to being a territorial system for the UK. That is going to present the most wonderful boundaries for abuse for large companies deciding when something is within or without the UK for taxation purposes, which is going to open up a whole new avenue for opportunity for tax avoidance that has not previously existed, and will give rise to plenty more challenges in the future, which will probably increase the tax gap and reduce the tax yield. I am very worried about that as a particular risk for the time to come.

John Thurso: I think that is a subject in itself. I think I had better hand back to the Chairman before we get going on it.

Chair: Andrew.

Q39 Mr Tyrie: I just wanted to clarify this coincidence with Vodafone so that we are clear what you are saying. Are you saying that we should or that we should not read anything into the fact that Vodafone over provisioned?

Richard Murphy: Look, I am saying that it is very strange, in terms of the timing of announcements, that the Chancellor should have gone to-

Q40 Mr Tyrie: Okay, hang on, hang on, we will come on to timing in a minute. You raise over provisioning, and I want to be clear what significance we should apply to that.

Richard Murphy: It is well known that large corporates have played plenty of games with their tax provisions over many years. One of the reasons why I suspect some of them are quite happy not to close tax inquiry cases, is that they would rather like to have a number of years open so they can play around with their provisioning to make sure they can deliver the results that the market wants of them. But the point in this case was that they had made a specific provision and it appeared that it was generous in terms of the settlement made. Candidly, I am surprised that they would have made such a large provision if they had not received advice that they should put a number of that scale on their balance sheet, given the risks involved. It would be a risk assessment. It turned out that the liability was substantially less than their internal risk assessment, one can presume, as a result.

Q41 Mr Tyrie: Even though the majority of firms over provision, you are nonetheless surprised that Vodafone over provisioned?

Richard Murphy: The amount of over provision we are talking about generally is very, very much smaller than that. If we are talking about a percentage of the tax charge, we are talking, say, if the effective tax rate is 23%, they might have provided 24% and it would be revised by a percent the year afterwards. We are talking about something that is much smaller.

Q42 Mr Tyrie: So this was a sufficiently large over provision. I am trying to clarify exactly what you are really saying. Are you saying that the size of the over provision was sufficiently large for you to be concerned-suspicious, at the very least surprised-by the settlement coming in so much lower and we assume this may be caused by some other motivation?

Richard Murphy: This was a very large provision. It was a sufficiently large provision that when it was first disclosed to exist, when the nature of this dispute was first disclosed, it became press news in its own right. It had an impact upon Vodafone’s share price, if I recall correctly, when it was first noted that the provision existed. Therefore, the settlement was itself a major event with regard to the company’s fortunes and to find that you have over provisioned by around £1 billion or so is significant, in terms of the overall tax charge and the overall results for the company for that period. It is therefore inevitably going to attract attention. Nobody knows, and I do not know and I have no way of knowing, whether the outcome was right or wrong, and I am not making any aspersions-

Mr Tyrie: I am not asking you to do that, I am asking you-

Richard Murphy: -I am simply saying that the timings were unusual.

Q43 Mr Tyrie: We will come on to timing in a moment. I just want to be clear, I am still on this question of your surprise at the over provisioning. This was a sufficiently large over provisioning for you to be surprised about it.

Richard Murphy: Yes.

Q44 Mr Tyrie: That is, that you think that it might lead one to want to ask questions about why it was so large?

Richard Murphy: Yes.

Q45 Mr Tyrie: Okay, I have understood that. Now let us get on to the timing. There are two possibilities, aren’t there? Well, three: one is that there was a coincidence, one is that the Chancellor of the Exchequer intervened, and the other is that Vodafone looked at the timing and they decided to try and force the pace, or I suppose it is possibility that all of them all at once simultaneously had the same idea. Have I exhausted all the possibilities or would you like to add some more?

Richard Murphy: I suppose that is a reasonable range of possibilities. There are only so many players we can put together on this.

Q46 Mr Tyrie: Let us go through them one-by-one. Do you think that George Osborne might have intervened on the HMRC side? Is that what you are suggesting, deriving from your surprise?

Richard Murphy: Look, let’s lay my cards on the table. If I was in doubt about this, it would be that we have a situation where we have a new Chancellor, who it seems has a very different approach from his predecessors, and we have a board of the Revenue who have outstanding cases to resolve. George Osborne has a longstanding relationship with Vodafone. It is not new. His interest in the company has gone on for a long time and the matter was resolved early in his tenure. It so happened at a timing that suited his political agenda. I doubt if he chose that. I think it was convenient that it happened at that time.

Q47 Mr Tyrie: It was a coincidence? You think it was a coincidence?

Richard Murphy: I think there may have been a subconscious desire to close the deal on the part of many of the parties involved, to get it out of the way early in his tenure as Chancellor.

Q48 Mr Tyrie: Then no mens rea here? Is that what you are saying?

Richard Murphy: Maybe.

Q49 Mr Tyrie: I am asking what you are saying, not "maybe". You have made a very significant-by implication-allegation, an extremely serious one, of the current Chancellor of the Exchequer-

Richard Murphy: I am not saying the Chancellor, no.

Q50 Mr Tyrie: I am trying to get to the point of what exactly you have really said and what you are not saying.

Richard Murphy: It looks unusual, and I am far from the only person because I did not put this into the press.

Q51 Mr Tyrie: I am asking you, you may ask others.

Richard Murphy: In my opinion the timing was unfortunate, from the Revenue’s point of view, that this case was resolved a week before a high profile relationship arose between the Chancellor and the company in question. It could have been much better managed if it had been released later, so that this did not give rise to suspicion that there could have been something untoward. Tax has to be seen to be managed fairly on behalf of all parties. The risk that any suggestion could arise, and I am not saying that anybody was corrupt in this case or did anything untoward, but the fact that an unusual decision of this nature arose a week before a political event took place, at which the Chancellor was present with the company in question, does give rise to the risk of suggestion that did subsequently occur, not from me-I make that very clear-by other parties, and I think-

Q52 Mr Tyrie: You are not sharing those allegations?

Richard Murphy: I am not saying that it was right or wrong. I am saying what it does suggest is that some people could quite reasonably think that some were getting favours out of the tax system, which they were not, and that was not right and that puts a question mark over the equal treatment of all taxpayers. That would be unfortunate because equity has to be at the basis of the administration of the UK tax system, and if there is risk that there could be suggestion of a failure to deal with all taxpayers equally then the Revenue should take every step possible to avoid that risk arising. The fact that the Chancellor was going to India was known. The fact that he was presumably making an announcement with regard to Vodafone was known. I think that should not have therefore become an announcement by Vodafone the week beforehand, and every step should have been taken to try to avoid that.

Q53 Mr Tyrie: This is a press management issue?

Richard Murphy: It is press or political management but because the consequence is you may have undermined belief on the part of the ordinary taxpayer in the equity of the management of the UK tax system, and that has to be to its detriment. That is the point I am making.

Chair: Okay. Cross examining finished?

Mr Tyrie: For the time being.

Q54 Chair: Can I say, I think-leave the Chancellor out-this is the difficulty we are in. We had the Minister in front of us, and I don’t know why he bothers to be Minister with the restrictions placed upon him, in terms of what he sees, what he does, what he says. Because of the obvious tie up and the protection needed to insulate politicians from individual people’s tax affairs, it has got to the degree where this is almost a secret society and that is why, when things are raised, I think it places innocent individuals in a very, very difficult position, which I think all politicians have been in, some time in their life, where allegations are thrown.

Graham, what I haven't had through all the discussions, which HMRC have been clear on, is that a new policy is instituted that is highly individual. A senior officer goes in and makes it clear he goes in to meet the managing director or the chairman, has a cosy chat and-not so cosy-makes threats about putting all these people in, and over dinner a settlement arises. If that happened in open Government all hell would be let loose, and quite rightly. I am relaxed about that, but what I want to know is, what was the system before, and what were the safeguards, right? That is the first thing. There must have been a system and there should have been-and hopefully there must have been-safeguards. We now have this highly individual system that is highly dangerous to the reputation of people going into it. The great protection is transparency. Somebody looks at it, well away from them, and says, "Yes, that is right". Did we have that under the old system and do we have it now?

Graham Black: I don’t recognise the system that you think we have now. I don’t think it works with somebody going in and having a cosy chat.

Q55 Chair: That is what he volunteered at this meeting before the Committee.

Graham Black: No, bear in mind what was said at the beginning, which is that the vast majority of big, high risk corporate cases are dealt with by a team of professionals. They go through it. They go through a proper governance procedure, with people looking at the case, the strengths and merits of the individual case, and at the end of that we either litigate or we-

Q56 Chair: There are various protocols for that that are all written down and could be made available to this Committee?

Graham Black: Yes, absolutely.

Q57 Chair: That is very good. Who scrutinises this?

Graham Black: I would hope that the National Audit Office would.

Q58 Chair: No, I am not interested in your hopes. We all share them. What is the system, to your knowledge?

Graham Black: The system involves a fairly complex corporate governance procedure, which has various layers in it throughout the whole process of the inquiry. There are a number of people involved.

Q59 Chair: That is written down?

Graham Black: That is written down as the governance system.

Q60 Chair: So we could ask for both documents, but do you have any idea how arm’s length is the scrutiny? It is not going up to Dame Lesley. It is going sideways to people who are non-executives, is it?

Graham Black: The scrutiny is normally going up the chain towards the Commissioners, ultimately, in very, very large cases, or there is a governance board within the high risk corporate system that will look at the case, which involves all sorts of technical experts and legal people who will look at the case. It is not a small cabal looking at this. It is quite a large group looking at the technical-

Q61 Chair: I think that is very useful, and we could ask for the papers because I think that is absolutely key to stifling speculation that harms individuals’ reputations, and so on.

Let me just ask you this. I was going through my files before I came here and I came across Sunday Times, Google. You are mentioned, Richard, you have commented on it, but Google have a £2 billion business here and pay £3 million tax. To anybody that raises all sorts of questions. Tell me, Graham, where in the vast HMRC exercise is someone looking at that sort of operation? I will broaden it away from Google.

Graham Black: Thank you. You could see my answer coming there.

Q62 Chair: There is a shadow Chancellor. I am just saying they are a company doing business and the article was very interesting, going through Dublin, going through Amsterdam, where on earth they pay tax to it is not clear but it is this business. Who does it in the HMRC, which unit, which exercise deals with multinational companies? Is this what we are talking about?

Graham Black: Yes, we were.

Chair: Large businesses and so on; and secondly, the offshore operation, who follows it through and can we follow it through?

Graham Black: Most of that would be dealt with within the bit of HMRC called Business Tax. We have a Large Business Service that looks at the very largest several hundred multinationals, and we will also look at ones that we think ought to be in the largest several hundred, but are not. So they risk assess the whole of the large business population to see that they are dealing with the right cases.

When it comes to international aspects, we have our specialist section within FSS tax that looks at international corporate tax issues, and again they will be helping LBS to risk assess and they will be-a horrible phrase-horizon scanning to see if there are issues coming up or cases that they need to be looking at.

So there is quite a complex risk process in place within HMRC that would enable them to identify cases where they want to have a closer look. The difficulty we have is that we don’t have enough people on the ground to do as much of that as we ought. We may see a risk, but do we have enough people trained to a sufficiently high calibre that they can deal with the risk? The answer is we don’t. We have to pick and choose which risks we look at. That means there are a whole range of risks that we effectively park, "Hopefully we will come back to it later, but maybe not".

Q63 Chair: Do we have individuals or do we have the power, do we have the interest, do we take the initiatives in terms of delving, following the trail, Google’s trail? If you are raising risk that must be ringing bells somewhere, a big corporation like Google paying £3 million. I think it is £3 million. Richard, your memory is probably-but I have the cutting. They had a £2 billion revenue stream. The way they do it takes it out of the UK. Do we have the ability to follow that and is it the same unit that would go following it?

Graham Black: I can’t talk about that particular taxpayer in any shape or form.

Chair: You mean Google? No, I was speaking about generally then.

Graham Black: That sort of area is definitely high profile for HMRC. We do have people who look at international companies, what activities they do in the UK and whether they pay the right tax in the UK. It is a very, very complicated tax issue. Of all the complicated tax issues we have, cross-border international ones are the most complex and require the most skills resource. We certainly have units that look at this, but I have a question mark over whether we have enough people to follow up all the risks.

Chair: Yes, okay. Richard, do you want to say anything? Dare you say anything? No, I am not challenging you. No, no, don’t take it as a challenge

Richard Murphy: The risk in this sort of situation-and let us be clear it is not just Google, it is a very common situation with regard to intellectual property-is that it is incredibly easy to relocate assets outside the UK to arrange, as Google and many sales companies do, that there is just a selling agent in the UK, very small amounts of tax paid but the revenue is being booked in another location, Ireland of course being a common place where no tax is paid either, incidentally, by most of these companies. So we have a complex structure that is opaque. We need to have two things: one, a political willingness to demand that companies be accountable for where they operate. We don’t know enough about where multinational corporations operate, which is why so many organisations are now calling for country-by-country reporting by multinational corporations with an individual profit and loss account for every country in which they operate. That would then let us answer these questions about, how much do they record here? How much do they pay here? How much do they record in tax havens and elsewhere? That is part of the political willingness to take on this issue to make sure that not only are we willing to take on companies but create the international co-operation that solves these problems. This is political willingness. It is not just part of the Revenue’s will, this is a political issue, and I am not sure that that willingness has been created yet to take on these large corporations.

Q64 Jesse Norman: I apologise for being late to this session, and I hope my questions don’t cover any ground that has already been covered. Can I direct a question to Mr Murphy to go back on the issue of Vodafone? Mr Murphy, did you look at the Vodafone settlement yourself in any sense, as it were run a slide rule over it, given your understanding of the profitability of the company?

Richard Murphy: I have made clear that I don’t have the details of how that Vodafone settlement was reached. I don’t believe that anybody who has commented has. I was making a point about the management of the expectations within that situation. The point that I was making is not that anybody has necessarily done something wrong, but it certainly was not managed well to make sure that the confidence in the equitable management of the UK taxation system was there, and that is the concern. If you have people seeing such issues arising they are going to turn round and say, "Well, if they can get away with something, whether they have or not got away with something, I will try to do the same". If I can draw a comparison, not in this session of the Parliament but the previous Parliament when we had a problem with expenses, people turned round and said, "If MPs are getting away with something", we had a whole host of SMEs saying, "then I will try and get away with things". It is about the management of the message of the way in which the UK tax system was managed that I was making a point about, not about the propriety or otherwise of that settlement.

Q65 Jesse Norman: From your point of view, the amount of tax paid by Vodafone was perfectly adequate?

Richard Murphy: I have no idea whether it was adequate or not because I don’t have a way of knowing, and nor has anybody else because that would be privy to the taxpayer and the Revenue.

Q66 Jesse Norman: That is helpful to me, thank you. Can I just ask another question, which is, given the unfortunate coincidence of the trip and the announcement, do you not think that is capable of an alternative interpretation? I am making the point that it seemed to argue for the probity of the system that these things could coincide and were not managed away.

Richard Murphy: I think it-

Q67 Jesse Norman: It bore that interpretation. You have made that point. In that case, I withdraw. That is fine, thank you for that.

Let me ask one final question. This is a question for you, Mr Black. In the case of Vodafone, there was some evidence given to this Committee by the relevant Treasury Minister that Vodafone had paid tax on its settlement. Have you covered that, colleagues? It now appears that they did not pay tax on the settlement.

Graham Black: Do you mean interest?

Jesse Norman: I mean interest. That is right. Do you think that implies that there was in fact further tax that could have been collected on that settlement from the interest that was not charged?

Graham Black: I must admit I have no details of it, and I am still an HMRC employee so I cannot answer anything about an individual taxpayer in any way, my apologies for that.

Jesse Norman: If it has not been covered already, Mr Murphy, you don’t have a view on that either?

Richard Murphy: These documents are not put in the public domain. How can I have an opinion on something that I haven’t had a chance to see? My answer is, if interest wasn’t paid that would be surprising because if I were representing an SME in such a situation I would expect interest to be paid. In that circumstance, again there is the question arising as to why does it appear that one case is different from another? I go back to the point that I was making that an equitable treatment of all taxpayers, irrespective of size, seems to be a fundamental of the UK tax system and if there is a perception that that is not arising and it is not occurring then, of course, it will give rise to an undermining of confidence in the tax system. That is the point that I was trying to make, that that appears to not be present in some of these announcements and in some of these settlements as they have been reported by others. If that is the case, then there is an issue of message management on the part of the Revenue, but perhaps on the part of the Treasury, to ensure that that perception of favour is eliminated. That doesn’t seem to be going on.

Chair: Thank you, Richard. Thank you, Graham. Thank you very much and I am sorry we have overrun but you are too controversial both of you, but there you have it. Thank you very much.

If we can have the next two witnesses in straightaway we will plough on, if you are ready. We are very apologetic about overrunning. Some people can’t be controlled but there we are. I know how the Chairman feels in a full Committee.

Examination of Witnesses

Witnesses: Professor Judith Freedman, University of Oxford, and David Sproul, Chief Executive Officer, Deloitte UK, gave evidence.

Chair: Good evening. Mr Tyrie is going to start on the tax gap analysis.

Q68 Mr Tyrie: Can I begin where I began the last session-I will give you a second to settle in-which is, what is your view of HMRC’s estimate of the overall tax gap, Mr Sproul, and then I will come to Professor Freedman?

David Sproul: It is very hard for us to have a view without knowing the fact base on which they have estimated the numbers, as to whether the £40 billion-odd that is quoted is realistic or not. I have seen and read the evidence that Mr Hartnett has given in terms of how that is computed. I have no basis on which to say it is wrong but equally I find it very hard to say that number is accurate.

Q69 Mr Tyrie: You are on record as saying that the UK corporation tax gap is a myth.

David Sproul: I am, and that was five or six years ago; possibly a little longer. I think back in 2006 I authored an article that was published on that. In terms of the statement "it is a myth", that was a piece of journalistic prose that was used at the time. The point of the article was that the real issue that impacts the corporate tax system is around the competitiveness of the tax system. That is what the focus of the article was and it was trying to draw the line that that is where, in our view, HMRC should spend their time and attention and that is what will bring the biggest benefit to the UK Exchequer.

Q70 Mr Tyrie: To expand on that just a little before I bring in Professor Freedman, the competitiveness of the tax system?

David Sproul: When one looks at the corporate tax system-let me context that-most of our experience is with larger corporates, therefore dealing with LBS and large and complex and less with the SME sector. But if one looks at the competitiveness of the UK tax system there are three things that really drive the competitiveness: one is the overall rate and allowances in the tax system; secondly, is the complexity of the system; and thirdly, is the certainty in the system. What I was saying in the article at the time was that we saw a significant risk of the lack of competitiveness, in terms of rate, complexity and certainty, causing the UK to become unattractive for large business. I think the evidence is that, post that article, 25 UK companies moved their headquarters offshore, which I think evidences that was a concern. But that is the point around the competitiveness, those three elements.

Mr Tyrie: Professor Freedman?

Professor Judith Freedman: I feel as strongly as anyone that avoidance and evasion should be tackled, but I don’t think that the tax gap is a concept that is a very useful tool in that war against avoidance and evasion because I don’t think it is a conceptually sensible thing to try to work out. In particular, I cannot agree with the definition that is in the latest 2010 document that the theoretical tax liability represents the tax that would be paid if all individuals and companies complied with both the letter of the law and the spirit of the law. I really take issue with the spirit of the law part, because either you have law or you don’t have law and the law has to state what it is.

Q71 Mr Tyrie: You seem to be describing something you think is wrong culturally with HMRC. That they are discussing the spirit of a tax system when they should-I think, what you are saying is-be looking only at means by which they can collect the correct amount?

Professor Judith Freedman: I don’t think there is such a thing as the correct amount. There is a problem, and Dave Hartnett has made this point in evidence to this Committee, that tax is an indeterminate thing sometimes, particularly when you are dealing with large businesses. We are living in a very complex world and you cannot say what the correct amount of tax is, any more than you can say that there is a definite amount of profit. Unfortunately, these are sometimes quite subjective concepts but I don’t think it is right for the Revenue to talk-as it does now more and more-about the spirit of the law, because either something can be taken through the courts and the Revenue can prove that they were right in their interpretation, or if they were wrong in their interpretation, because the courts say they were wrong, then we have to change the law.

Q72 Mr Tyrie: In your initial remarks you gave the impression, which I would invite you to take the opportunity to correct if you want to, that evasion and avoidance were both things that needed to be tackled in equal measure. Do you draw a distinction between these two or do you think it is now redundant?

Professor Judith Freedman: No, I think there is a very important difference between evasion and avoidance.

Mr Tyrie: I am pleased to hear that.

Professor Judith Freedman: I spend a lot of my time writing about that difference. That is why I am concerned about this blurring of that boundary, with the notion of the spirit of the law, which is defined in this document, The Tax Gap, as HMRC’s interpretation of the intention of Parliament. With respect, it is not for HMRC to decide what the law is. It is for the courts ultimately.

Q73 Mark Garnier: HMRC is aiming to raise an extra £7 billion a year through compliance, the intervention. That is quite a significant amount of money. Do you think that is an over-ambitious target or do you think that is easily achievable?

David Sproul: My view is it is achievable. If you look at the targets, that is the target at the end of that four-year period, so £7 billion. The reason I say that, if one looks at the evidence to date-I heard the earlier evidence-so you have looked at one particular taxpayer where £1 billion was raised from that taxpayer. If one looks at the offshore disclosure and Liechtenstein disclosure initiatives, between those they raised I think it is £4 billion. It is in the public record. So, if you look at the initiatives that have been taken and the focus on particular risk areas, then it seems to me it must be possible for HMRC to be optimistic about raising that target of £7 billion in that fourth year of the period under review.

Q74 Mark Garnier: Should they be targeting more?

David Sproul: It is very hard to say. I think they should be in a position where they are flexible on that target. We are in the first year of those four years. I would like to see how effective they are in this first year and the second year, but I do think it is important to focus on what HMRC have done, which is a risk assessment of where in their view they believe the greatest area of tax avoidance is and where they believe the greatest prospect of tax raising should be. So I would support and continue to focus on areas of greatest risk and reassess that target as they go through the next two years.

Q75 Mark Garnier: If they become over-zealous about this it might affect the relationship that HMRC have with business in general, small, medium and big businesses. Do you think that is a justifiable risk or do you think it is a red herring?

David Sproul: I think HMRC’s relationship with large business is very good. If you look at the last report of the NAO, which did a survey of LBS, for example, there was an 89% satisfaction rating with large business with LBS in terms of that relationship. I think the efforts that HMRC have made since the introduction of LBS, since the introduction following the Varney review of links, in terms of the approach to large business, has been effective in achieving HMRC’s objectives in terms of tax collection but has been done in a way that has improved the relationship with large business.

Q76 Mark Garnier: Professor Freedman, in giving evidence to us in May, Stephen Banyard told us that HMRC research-in fact, this was backed up, I think, possibly by Richard Murphy after-has shown that a third of small businesses were attitudinally non-compliant. Richard Murphy suggested that a third of businesses just don’t bother sending in their tax returns at all. Do you think that is a fair criticism?

Professor Judith Freedman: I haven’t done any recent empirical research on small businesses. My recent research has been on large businesses, but there is certainly academic research in the United States as well that suggests that small businesses are more likely to be non-compliant than large businesses. I think that there is also a question of how much resource they can put into compliance, so they have to deal with a lot of cost in relation to the amount of profit that they make. It would be understandable if they simply didn’t have the resource to make sure that everything was exactly correct.

Mark Garnier: When you say "they", do you mean the business?

Professor Judith Freedman: The small businesses, yes. When one looks at the figures in The Tax Gap, a lot of the cases of non-compliance are quite small amounts. The numbers of cases where there are really large amounts at stake are very small. So they may simply have been making errors, because it is a complicated world out there and it is a very complicated tax system and it is possibly not reasonable to expect those small businesses to work to the same level of accuracy as larger businesses can.

Q77 Mark Garnier: You neatly bring me on to my next question. I don’t know if you were here for the last session but I asked the previous two witnesses: do we fundamentally have a tax system that is far too complex for most people to deal with? I don’t just mean the people who are paying the tax, I also mean the people who are doing the collection. Both of you can help me with this one.

David Sproul: I think there is no question there is too much complexity in our tax system. The difficulty is working out where you go first in terms of reducing that complexity, and the efforts the Government has made in introducing the Office of Tax Simplification I would say is a move in the right direction. But complexity leads both to error and uncertainty, and neither of those are good either for the taxpayer or the Exchequer.

Professor Judith Freedman: I am on the Consultative Committee of the Office of Tax Simplification looking at small businesses, and so obviously I believe that that is an important thing to do. I also have concerns about that whole exercise because I think the only way to simplify the tax system is to simplify the underlying law and not just mess about with a few administrative things. So I am concerned that there is pressure on that Office to come up with quick wins, when in fact you cannot really simplify the system without looking at the concepts behind the tax, such as, for example, merging National Insurance and income tax, which would be a really big way of reducing compliance costs.

Q78 Mark Garnier: Yes, but it is ferociously complex, as we know.

Professor Judith Freedman: It is ferociously complex, but you have to put the resource in to do that because otherwise year-on-year it gets more and more complicated.

Q79 Mark Garnier: Coming back to my original point, I think most people accept that if you are a small business owner you are going to be concentrating on making widgets and not concentrating on the tax system, so obviously you get an accountant to come and do it for you but then that is a cost of compliance. I come back to my main point, which is, with a tax system that is so complicated does it make it impossible to be able to effectively deal with this tax gap because at the end of the day there is too much for the investigators to be able to deal with?

Professor Judith Freedman: Again, it depends what you mean by the tax gap. If you are saying that every single inaccuracy is a tax gap then probably, yes, it does. If you are concerned with tackling evasion then I don’t think the complexity is the problem.

Q80 Mark Garnier: In terms of avoidance, complexity creates opportunities for it, doesn’t it?

Professor Judith Freedman: It also creates a lot of costs for the businesses. In the small business area I think the problem is not that you have complexity that gives opportunities for avoidance but that you have complexity that makes it very hard, with the best will in the world, to comply precisely, for example, on employee expenses. It is tremendously complicated. There are pages and pages of guidance and you can’t really expect all small businesses to be able to deal with it.

Q81 Mark Garnier: No, fair enough. On any analysis, evasion and criminal activity account for more of the tax gap than avoidance does. Do you think that this great sort of argument that has been going on in the press about tax avoidance has led to resources being directed to the wrong area and in fact we should be concentrating more on criminal activity?

David Sproul: I can give a view. I don’t think it is an either/or. I think HMRC need to be focusing on both elements. If one looks in the VAT area, for example carousel fraud, there is a very real effort by HMRC to attack that, given the scale of the loss to the Exchequer. That is a very good example of where resource was put on something that is clearly evasion and clearly criminal. Equally, I think the resource HMRC have put into the HRCP programme-I heard the evidence earlier-is the right resource, in terms of the risk assessment process they have gone through in working out where there is the potential to realise tax to the Exchequer. So I think it is very hard to say it is a binary choice-I understand you are not suggesting that-and therefore it is quite hard to say at a time of scarce resource for everyone, including HMRC, should they move resource from one area to the other? Our view, based on what we see of the large business sector, is the resource HMRC have put to it is very well used and gets a good return for HMRC.

Professor Judith Freedman: One of the points of the risk raising process is to allocate resources, so it is not only about changing behaviour. In fact, it is mainly about allocation of resources. So it is not surprising to hear that the Large Business Service is able to cut staff, because the whole point is to work out who is a low risk taxpayer and then you don’t have to spend as much resource on that low risk taxpayer. So I think there is quite a lot of sense in trying to work out who is high risk and who is low risk from a resource allocation point of view. But I do think avoidance has to be tackled because in the end avoidance, on my definition, is showing where there is a problem with the law and then the law has to be changed. So you can’t ignore avoidance, although it is not necessarily a case of pouring in a lot of people on the ground. It may be that you have to focus that work at the top end.

Q82 John Thurso: Can I come, first of all, to you Professor Freedman? I want to talk about the High Risk Corporate Programme. I think you were here when I was asking the questions. You heard Graham Black tell us that broadly his view was it was working quite well. I will come on to the corporate governance questions in a moment, but do you think that was an accurate view and one you would concur with?

Professor Judith Freedman: Yes. The research we did at the Centre of Business Tax in Oxford suggested that it was working quite well. We did a pilot study that suggested there were some problems and by the time we did our main study some of those problems had been worked through, and subsequently I think there have been further improvements. So I think there is a general view that it is working quite well, from the allocation of resources point of view. I don’t know how much it is changing behaviour and I am not entirely convinced that those two objectives are consistent; the resource allocation and the modification of behaviour. The modification of behaviour part worries me more but I think the resource allocation part is fine.

Q83 John Thurso: Can I just pursue that, because Richard Murphy said much the same thing and I think-I don’t want to put words into his mouth-to sort of paraphrase, you don’t actually change the behaviour of big corporates. They make a calculated assessment of what is in their best corporate interest, and if you have a high risk group chasing you basically you pay up.

Professor Judith Freedman: I would never want to say the same thing as Richard Murphy, but I wasn’t quite saying the same thing. I was saying that there are two different objectives, so you may find that some businesses will change their behaviour because it will be important to them to be low risk, and other businesses may think, "Well, we are so complicated anyway and we want to carry on engaging in complex cross-border transactions. We want to be very transparent, but we don’t want to change our behaviour to the extent that we won’t engage in innovative tax planning". In that case, I think you could have a clash between your objectives because you may want to encourage them to be transparent and at the same time they may continue to want to behave in what the Revenue might think is an aggressive way, but they might think it is just pursuing their planning in an appropriate way. I think that could be problematic.

Certainly, there is some evidence that some businesses want to be low risk, want to be openly low risk and have modified their behaviour for that reason. So I think some businesses have decided, for example, not to engage in any scheme that has to be disclosed under DOTAS, but I don’t think you will change every business’ behaviour through this.

Q84 John Thurso: It goes a bit to what you were saying earlier with the difference between the spirit and the letter of the law. There is no such thing as the spirit of the law but there is the letter of the law, and if you have a construct that says a Korean based operating company that is owned by a corporation in Thailand that has a tax treaty with the Dutch Antilles that imports its dividend into a Jersey-based company before arriving in the UK, which actually reduces the tax by about 35%, is all legal, that is fair and dandy and the fact that it is completely against the spirit is not the point and they are not going to change their behaviour.

Professor Judith Freedman: Who is saying it is against the spirit? That has been called by one of my academic colleagues a "shadowy parallel legal world". How do we know what the spirit is? As taxpayers and advisors to taxpayers we can only look at what the law says, so if the structure of the law allows that then how do we know it is against the spirit?

Q85 John Thurso: On this question of effectiveness of the programme and the group and that second point about "spirit" versus "letter", your comments.

David Sproul: Yes, thank you. On the effectiveness, again, from what we see, I would say it has been effective. If one looks at the programme, in terms of dedicating resource in HMRC to those areas where they see the ability to resolve issues quickly and therefore save litigation costs and maximise tax collection-I will come onto the point about behaviour-then, in terms of the effectiveness of that, our perspective would be it has been effective. It has not caused wholesale behaviour change. That is a very hard thing to measure. But I would agree with Judith that it has caused behaviour change in certain organisations that see an advantage in being classified as "low risk" and agree very transparently to make some changes to their approach, particularly in relation to dealing with packaged tax schemes-far fewer of those around-or a scheme to provide disclosure.

Is it possible to say there has been a wholesale change in behaviour? It’s not. But I think it is worth remembering that, when one looks at large corporates, there is a very heavy burden of corporate governance that applies to large corporates, which covers the approach they take to tax policy in the same way it covers the approach they take to anything else. I wouldn’t overlook the importance of that, in terms of the approach most large corporates take to tax planning or tax avoidance.

In terms of the spirit of the law, all I can do is echo and agree with Judith’s comments in terms of the fact that there is the letter of the law, and this notion of some extra governmental organisation being able to interpret the spirit of the law and then apply that is just wrong.

Q86 John Thurso: Can I come on to the question of "big deals" and the governance thereof that we covered. In particular, the Vodafone deal was used as an example. Richard Murphy made the point that it was settled a week before George Osborne went to India; the implication being that it was somehow deliberately done. The critical point, surely, is not that that might have happened but that people can think that it might have happened. Therefore, is there not a compelling case for some greater degree of corporate governance and signoff, in these kinds of deals, so that there can be no suggestion of any impropriety on anybody’s part?

David Sproul: I think one has to position this in the context of the statutory obligation HMRC have with taxpayer confidentiality. Therefore, it is very hard to-in fact it is impossible-to go into the public domain with what the details of any particular settlement are. In terms of the governance process around HRCP cases-and I don’t have the HMRC guidance-my understanding is there is governance within HMRC, which is separate from the officers leading the settlement discussions, the negotiation, the work over that period, from those who ultimately approve the terms of the settlement. So my understanding is there is some governance there; there is appropriate governance. I think the thing we are facing is the difficulty of making that process and the detail of that process public, given the appropriate confidentiality of taxpayers’ affairs.

Q87 John Thurso: That was the point that we were coming to. In his evidence, David Gauke quite clearly said, "Look, you can’t have a Minister making a decision about an individual tax case" and everybody accepts that. Dave Hartnett gave very similar evidence, but Dave Hartnett basically is the person who is in the frame, as we heard from the last session, as having signed off that particular deal. The problem with that is, you have one person who may be doing it-and I am absolutely certain is doing it-very responsibly, but the perception is still that it has been signed off. So how do we get to the point where we don’t reveal the details publicly-because we don’t want to do that -but politicians and the public can have confidence that the deal that has been arrived at, the sum that has been paid, the details of the negotiation are actually correct and in the correct interests of the system? How do we get that?

David Sproul: There are two points. The first is, my understanding is that in all settlements within HRCP there are two Commissioners who have to approve the deal. I know Dave Hartnett has made the point he was one of them. I think there is always another Commissioner on the board that has to be involved in that. I heard Mr Black’s evidence earlier, some of his evidence about the written guidance internally, and it seems to me that may be something that can be put in the public domain in terms of the procedures that have to be gone through in HMRC, as with any body that reviews those sorts of settlements. If one looks at HRCP-and I can’t talk to the specifics of Vodafone-generally we understand what we see is these are recommendations made by senior officers of HMRC, based not on a fireside chat, but on weeks and months of detailed work looking at the potential liability. Those recommendations are then assessed by Dave Hartnett and others on the board before the detailed negotiations were discussed and then started with the taxpayer. I would say there is a very rigorous review in governance process. I understand the concern that that isn’t public and therefore that creates the risk of a perception that it is not rigorous and fair.

Q88 John Thurso: Maybe we should ask the Governor of the Bank of England to do it because we are asking him to do everything else at the moment. Sorry that was facetious; I do apologise, Chair. The strategy of HMRC requires that if they think there is a liability, they should go for the full liability plus the interest and not back down, and litigate if necessary to get it. Yet the whole ethos of what we have been discussing seems to be around negotiation. Is that actually a misunderstanding of the process, in that the process is about two interpretations of the law and therefore liability, which are being tested in a dialogue as to arrive at a common view of the law and it is that common view that gives the liability, which is then paid. It is not actually a negotiation as to the quantum.

Professor Judith Freedman: I don’t want to comment on any specific case when I don’t have any knowledge.

John Thurso: No, I am talking about generality.

Professor Judith Freedman: I think in general terms there is an on-going process. There could be case law going through the courts, there could be case law going through the European courts, which might be changing things. So you could have a company that was making a provision, but then things could change over time so that the advice made initially would be varied if they went and took advice again. HMRC could be aware of changes that are coming up, so it is not that there is one figure that one side thinks should be paid, and one figure that the other side thinks should be paid because it may be genuinely uncertain what would happen if the case were litigated, and in that case it may make perfect sense to settle because litigation is very expensive.

David Sproul: May I add a comment on that because I agree with what Judith said. Our experience is that, in looking at HRCP cases, there is a whole range of tax issues being looked at. There will be issues, which are exactly as Judith said, where there is uncertainty; the law is not clear; the facts are not clear, and it is not about horse trading. It is about working through, based on that fact, and coming up with best view and that will be part of a negotiation. There are other issues within the remit, which HMRC will say are clear on their view. They are not prepared to negotiate in any way on that issue, and the taxpayer either accepts HMRC’s view or litigates. In those cases, in our experience with HMRC, if the taxpayer chose not to accept it then HMRC would take that out of the HRCP programme and that would continue to litigation.

So I wouldn’t like anyone to have the impression that this is a negotiation or horse trade of all open issues, and "Let’s come up with a middle number". The details are looked at very seriously, and those issues that tend to be resolved through that are those where the law is unclear, where there are alternative interpretations of the law or the fact pattern.

Q89 John Thurso: This is a very important point because I think most people think that, in these very big companies, there is mediation between two points to arrive at something both sides agree as a number, but in actual fact it’s not. The numbers are generated by the mediation on the points of law where they arrive at an interpretation that they can both live with, and once they have done that then the computations fall from the decisions on the interpretation. Therefore, none of it ever should be a negotiation in terms of, "I want 10. You can have five. I will give you seven, take six" that type of thing.

David Sproul: I think that is an accurate assumption.

John Thurso: Thank you.

Q90 Chair: Can I just come back to you, David, in terms of one of the answers you gave of concern because of the necessary confidentiality? Something hits the headlines and we all start asking, and we need reassurance. You had the response to me in terms of "Was there a system and was there an independent system of scrutiny". There is this new system that seems to be highly personal; there is some difference between the witnesses in past meetings as to how personal it was. The point was made today about it being a group rather than an individual, but the individual claimed he went into a room face-to-face with the chairman or something. You know it better than us; we are just politicians, lay people. When you said two Commissioners have to sign this off-and I think you said Dave Hartnett is a Commissioner-it struck me as how those are individuals who are well away from the place, because I sometimes get letters and your appeal is to a Commissioner, and I think that is like an ombudsman, but it is not, it is one of the characters who manage the people who have taken the decision. Can you tell me, do you know specifically how neutral or divorced or separate is the body that would scrutinise and approve the deal, so that I, as an ordinary taxpayer, an ordinary member of the public, when reading the paper thinking, "This looks bad", know that somebody well away from it says, "No, we have looked at the papers and it is okay"? Is that a fact or is it, as you say, two Commissioners, two colleagues of the person taking the decision?

David Sproul: To use your description, it is muddy in terms of, "are they close, or not?" I agree with you. This is not an independent body; it is not an independent ombudsman in the way you described it; they are officers of HMRC. My point is that they are independent from the process that has been gone on; they are independent from the working process, and if I may add a comment because, having seen these processes from the taxpayer side-we have acted-it is important to understand that this is a very intensive process. This will have five, six, seven, eight very senior HMRC officers involved intensely over two, three, four, five months, with similar teams from the taxpayer’s side, going through the issues, going through the legal position, going through the financial implications, and through that process coming up again-and I go back to Mr Thurso’s comment-not with a horse trade or a negotiation, but with proposals based on each issue as to what the appropriate level of tax is. That is the proposal that is then put to Mr Hartnett, for example. So to that extent he is independent from that thought process. In the end he and his colleagues are going to have decided whether they support that recommendation.

Q91 Chair: Just say I am with you up to now but a senior individual says, "Yes, I will go in with that and I will finish these negotiations off." It blows up in the unfortunate circumstances because of this contingency fund. It looked as though he had negotiated weakly. If you were Deloitte-you can’t speak for Deloitte-would you actually be recommending a system of scrutiny, of confirming so the public can be reassured that this confidential matter has all been dealt with to the standards, and so on, that it is separate enough in HMRC? Somebody mentioned non-executives for example and I thought, "Well, that is a bit further away than seems to happen".

David Sproul: Of course what we do have is the NAO reviewing LBS and the process, so that is independent. Now whether that will review individual settlements, but certainly the NAO is in the middle of their review of the LBS and I think we are expecting their report in the next few months, and I am assuming that will go to their view on HRCP, for example. So I think there is an independent review of the whole process that is out there and coming. It is hard for me to comment from the outside, because I am not in the inner workings of HMRC, as to whether there would be a better or worse answer were those who handled the negotiation-I think that is your question-totally independent. What I would say, as in any negotiation, you have to assume that both sides are equally satisfied and dissatisfied with the outcome or there would not be a settlement.

Chair: That is not a great comfort to me as an individual taxpayer.

Q92 Jesse Norman: I must say I found that last point very odd. The fact that negotiations reach a settlement in no sense necessarily results in the idea that they are both equally happy with it. One of them may be incredibly unhappy with it but it is better than any alternative they have, and that may be the situation the Revenue finds itself in with large multinationals that can move profits around at will. So I don’t think there is any suggestion that a settlement implies equal happiness or dissatisfaction. I also disagree with my colleague John Thurso. It seems to me that, in thinking about these large corporate tax negotiations, there will always be a price tag attached to certain outcomes on specific negotiations. Both sides will know-or at least certainly one side will know-what its upside and downside is in each particular part of any ramified negotiation, and they will try and win on the big ones and lose on the small ones. There is no dissociation between the decisions on points of law and the financial consequences of that; that would be omnipresent, or the negotiation will have been very badly handled.

Professor Freedman, you said there is no certainty in some of these situations. It makes a very subtle and important point. There may be, in fact, no exact answer as what is the correct amount of tax to be paid. Am I right in thinking that was your view?

Professor Judith Freedman: I said that, yes.

Q93 Jesse Norman: So that would mean that the Revenue would have had no warrant to say that it only collected the amount of tax that was due in some of these cases because it could not know?

Professor Judith Freedman: It will have done its best to collect the amount that is due on the best advice it has.

Jesse Norman: Yes, it will have done its best. That is a slightly different claim-

Professor Judith Freedman: But had the case continued and gone to court we cannot know exactly what would have been decided, because courts are independent and courts can come up with different views.

Q94 Jesse Norman: If it had been litigated, and with all those costs and benefits gone to a court, a court might have decided in one way or the other, and in that sense there may have been a toggle in the amount of money that would have been owed.

Professor Judith Freedman: But usually a court would have decided no liability or liability. So the courts have to come, in the end, to a binary decision, yes or no.

Q95 Jesse Norman: So the number would either be above or below the number that was reached in some cases, and in some cases it might be quite different. But the point is also that the other thing that might determine it would be the quality of the negotiation that was done from each side. A poor negotiator, even though someone who was right on the law, perhaps right without knowing it, would end up with the lower amount of settlement than perhaps the tax that was really owing. That is possible, isn’t it?

Professor Judith Freedman: They would have to take the best advice they could and come up with the-

Q96 Jesse Norman: I agree, but the point you have made is right; if there is no certainty then the Revenue cannot correctly claim that it collected the amount of tax owing because it does not have the warrant. There is no certainty. All it can claim is-

Professor Judith Freedman: It can claim it collected the amount it considered on the advice it had received to be correct. Yes.

Q97 Jesse Norman: I think that is right. Would you be surprised in general, Mr Sproul, if a major multinational did not have interest charged on taxes owing? Would that be a normal part of a negotiation?

David Sproul: It would be a normal part of the administration of the tax system that, if tax is paid late, interest is charged, absolutely. What I can’t comment on is whether, in a negotiation, that interest is compound or packaged with the overall financial settlement. But on your first point, absolutely, in the normal administration of the tax system you would expect that, if tax is paid late, interest is charged.

Q98 Jesse Norman: That seems to happen to everyone else. So then the question would be, if the interest wasn’t charged on the taxes owing that might point to a failure of negotiation. The thought might be, "We came out with a number and it was not the number in fact that we were owed", if you included the full interest but it was whatever the negotiation resulted in. That is a possible outcome, isn’t it?

David Sproul: It must be a possible outcome, yes.

Q99 Jesse Norman: Would you be concerned, Mr Sproul, if there were certain flags in the process of reaching a tax outcome for the Revenue that went the wrong way? For example, if it subsequently proved that the advice was not perhaps as uniformly mixed, it was perhaps a bit stronger than the Revenue believed, or perhaps that the Revenue did not commission enough advice to support the position or did not commission it from the very best relevant authorities. Those would be signs that they had not done what was necessary to extract the full amount of the tax owing?

David Sproul: They could be, yes.

Q100 Jesse Norman: Would it not also be true that another sign would be, if the case officers responsible for a particular case dissented from the amount that was actually ever raised, if they registered an internal concern that not enough money had been raised out of the settlement that would be another flag, in retrospect?

David Sproul: It might well be, yes.

Q101 Jesse Norman: Thank you. As representatives of the taxpayers, how are we supposed to know that these things have happened since the Minister is never shown any information that isn’t what a private citizen would, therefore, be entitled to in the public domain?

David Sproul: That is a very good question. I don’t think I have the answer to that. I think it goes to the earlier question about-

Q102 Jesse Norman: It does, it picks up on the question that John Thurso raised. Professor Freedman, do you have a thought on that because it does seem there is a huge gap of accountability, and what is very striking is that this accountability gap has been worked around in other interestingly parallel situations? Let me take one, for example, in the review of intelligence. We have people who were given specific responsibility, accountable to Parliament-Lord Carlile, in the case of intelligence, judges often-to review intelligence or review the collection of intelligence, in order to satisfy a public need for the knowledge that it has been done in a proper, correct and publicly accountable way. Do you not think we should be looking at this kind of approach in the case of these-

Professor Judith Freedman: As has been said already, we do have the National Audit Office and we will have to see how extensive a review they can do. I have been-

Q103 Jesse Norman: But that would be ex post. That would not be able to influence the process of negotiation, which is sometimes rather protracted.

Professor Judith Freedman: I have just been in the United States where they have something called the Treasury Inspector General for Tax Administration, TIGTA, and that might be something that your Committee might want to look at because that was set up in 1998 for precisely these reasons. I have been discussing these cases with academic colleagues in America and they said, "Oh but we have TIGTA" so perhaps there is a need-

Q104 Chair: Could you send us the details; can you send us some details?

Professor Judith Freedman: I can send it to you, yes. But it could be that there is a need for some kind of procedural change or openness, not necessarily because something has gone wrong but, as people have pointed out, just to protect all the players.

Q105 Jesse Norman: Some of these settlements may take years and possibly decades to solve. It is a long term thing. Of course, some of them may also take shorter periods of time but point to systemic failure in how they are concluded, which would be picked up by this more interventionist approach, which would not be picked up by an NAO report some way after the fact.

Professor Judith Freedman: I am not sure whether TIGTA does intervene in the process, I think it is rather more like the NAO, but one could look at it.

Jesse Norman: It would certainly be a useful model, and I think we, as a Committee, ought to give some consideration as to ways to fill that accountability gap, based on these other models because you have very helpfully described how it exists and reminded us of its centrality in one or two key cases. I think that is it for me.

Q106 Chair: I wonder, Professor, if you know the constitutional position of the HMRC? It doesn’t only extend to confidentiality of people’s accounts. The last set of hearings ended up with how badly HMRC treat their customers, and some of the experiences are horrifying; call centres. When we pressed the Minister it was almost, "This is operational". It was like speaking to a chief constable, or a chairman of a police committee, "I may be the elected head, but I have nothing to do with anything that happens". "Well, why on earth are you there?" Do you know the constitution position? Each agency has a different status and there is a status where you cannot touch them and there is a status where you can interfere. This seems to be one that is outwith the power of any politician to do anything.

Professor Judith Freedman: They are answerable to the Public Accounts Committee, aren’t they?

Q107 Chair: They are accountable to us, and they go before the Public Accounts Committee. We discussed yesterday with the Bank of England, the Governor, what that means. It just means they come here for a couple of hours, flannel, get out there as quickly as possible with the least damage. That is about the basis of it. In terms of saying, "At Call centres half the calls are not dealt with, do something now". "No, nothing to do with you", you know. There you are.

Professor Judith Freedman: That does seem to me to be something that needs to be explored.

Q108 Chair: Okay, but you will send us something. A last thing-you may not want to say anything, I warn you now before I say it-I will accept a no. I am a sort of individual who comes into this not being part of the exercise. It is like the Emperor’s clothes, I come and I hear things going on and I think, "This is not true". That reference I made to Google, the headline is not that they only paid £3 million; it was that Google avoided paying £3 billion tax in the UK. I am just a layman; I represent ordinary people who are paying their taxes and working hard for it, and I think well, "Why on earth does this happen?" You are deep in the tax world; do you not sometimes sit and think, "Why on earth is this happening?" Do you say, "Why is it happening operationally?" or if you ever say anything, do you say, "Why aren’t the politicians doing something about it?"

Professor Judith Freedman: I am an academic, so I look at it at a much more theoretical level.

Chair: But that makes you more objective, doesn’t it?

Professor Judith Freedman: I am also not in the tax world, in the sense that some of your other witnesses are, and I say-but this is not something your Committee can do much about-that the problem is probably the international tax system. So I don’t say necessarily something is going wrong with the administration but that we don’t have the right rules, so at each point I try to recommend ways of changing the law rather than just the administration.

Chair: You don’t have anything to say on it, do you?

David Sproul: Nothing further.

Chair: Wisely. I apologise for overrunning the first session, but thank you very much for your evidence. It has been very objective and most useful. Thank you.

Prepared 8th March 2012