HC 1371 Treasury CommitteeLetter from the Chief Executive, HMRC, to the Chairman of the Sub-Committee

I am sorry that we have not yet had the opportunity to meet or to have a discussion, though I hope we can do so soon. I thought it would be helpful to write, however, because the Department is responding today to the Public Accounts Committee’s (PAC’s) report on settlement of tax disputes which came out in December. Our high level response will be set out in the formal Treasury minute but you may find it useful to have a fuller explanation of the changes that I plan to implement.

The Public Accounts Committee has expressed two key concerns about our handling of large tax settlements. First, blurring of the responsibilities for negotiating tax settlements in the largest cases and making decisions to accept those settlements. Second, the lack of a transparent assurance process for settlements of a significant size, leading to a loss of confidence that settlements are reached on a basis that respects the interests of taxpayers at large.

I believe that the package of changes I plan to make will address those concerns by introducing clear and structural separation of roles in our decision-making and by strengthening, and making more transparent, our assurance processes.

Before I set out the detail of what I propose, it may help to recap briefly on the context. The vast majority of differences of view with taxpayers as to the correct amount of tax to be paid are settled by agreement under long-established statutory provisions, with only a minority (less than 10%) going to litigation. All disputes with taxpayers, whatever the amount at issue, must be resolved in accordance with our published Litigation and Settlement Strategy which requires that any settlement must be consistent with the law and represent an outcome that we might reasonably have expected to obtain from litigation. Our internal governance processes are designed to ensure that settlements by agreement are reached on that basis.

I now plan to bring in a package of changes to those processes to provide greater assurance and transparency and improve public confidence in what we do.

The package comprises:

a new assurance role at HMRC Commissioner level with an explicit challenge role in decision-making on cases;

a systematic review programme of the processes used in settled cases;

an enhanced role for our Audit and Risk Committee on tax settlements;

an annual published report on our tax settlement work

a new published code of governance for tax dispute resolution.

Taking each of those elements in turn:

The new assurance role

I plan to introduce an assurance role at Commissioner level (which will be an appointment as 2nd Permanent Secretary in HMRC). For our largest and most sensitive cases, where settlements have to be agreed by HMRC Commissioners, this Commissioner will explicitly take the challenge role of ensuring that:

the proposed settlement secures the right tax efficiently and in so doing treats taxpayers even-handedly; and

HMRC’s internal governance procedures have been followed.

Once this role is established, decisions on our largest cases will be taken by three Commissioners—the assurance Commissioner, the Director General (DG) for the relevant line of business and a third Commissioner from a different work area. In this way, I intend to put transparent challenge and separation of roles at the heart of our decision-making.

If proposals to settle a case are not agreed by all three Commissioners, the case will be sent back for further work, with the possibility of seeking to bring the case to litigation if agreement cannot be reached on an acceptable basis.

I intend this Commissioner to be an experienced tax professional. They will have no role in our engagement with taxpayers on their particular tax affairs, nor any line management responsibility for case-workers.

Reflecting the recommendations in the PAC’s report, we plan to reduce the current £250 million threshold for decision-making by Commissioners to £100 million tax at stake. We estimate this would broadly double the number of cases considered by Commissioners in a year (that is, to around 20 cases). We are also considering how a sample of cases over £10 million can be decided in a way that provides robust assurance but keeps the numbers manageable.

Scrutiny of settled cases

To improve scrutiny of our tax settlement work, we will introduce a programme of reviewing processes in settled cases to check that they are sound and that we have applied them correctly. The programme will cover all of our tax settlement work, with samples of cases drawn to be proportionate to risk. This approach will not involve re-opening settled cases—the objective will be to learn lessons for the future and improve our processes. The assurance Commissioner will be accountable for the programme of reviews and for ensuring follow-up actions are taken.

Audit and Risk Committee

I will also be asking our Audit and Risk Committee—which is chaired by a non-executive Director with tax experience and includes NAO representation—to take on an enhanced role in overseeing our tax settlement work. The Committee will consider the findings of the review programme on settled cases (outlined above) and recommend follow-up actions.

Annual report

Under this new model, we intend to produce a report each year on the outcomes of our tax dispute work (while respecting taxpayer confidentiality). The Audit and Risk Committee will sign off the report which will be published (probably as part of HMRC’s annual report). We would expect to make the report available to your Committee and to the PAC.

Code of governance for tax dispute resolution

Finally, we will pull all of this together into a published code of governance for tax dispute resolution. This will set out the processes we apply across the range of cases to ensure that tax settlements are reached on an appropriate basis; the levels of authorisation in place; the separation of the negotiation role from those making settlement decisions; and how we ensure consistency of decisions when the same tax issue occurs in several cases. This will help us to bring out that we have a coherent and proportionate approach for cases of all sizes, underpinned by our Litigation and Settlement Strategy, and will demonstrate that our treatment of taxpayers is even-handed.

I believe that this is a workable package of changes that builds clear separation and challenge into decision-making, improves scrutiny and introduces much more transparency. Key to the package is the role of the assurance Commissioner, because he or she will be a decision-maker on the largest settlements. We will introduce much more systematic review of our settled cases. We will provide more information about the way our processes work. And by using our Audit and Risk Committee more fully in this area, we will increase independent oversight of those processes.

I aim to have put these changes in place by the summer. You may, of course, once the new model has been put in place, want to discuss how it is working and assess how well the changes address the concerns that have been identified. I will be happy to discuss that with the Committee. I too will wish to keep these changes under review.

The Treasury minute will be laid later today. We will also be issuing a press release after that, so that there is transparency about our plans. You may well want to explore in more detail how we see the new model working and I would be pleased to have a meeting to talk you through that.

I have written in similar terms to the chair of the Public Accounts Committee and am copying this letter to Amyas Morse, C&AG.

Lin Homer, Chief Executive

27 February 2012

Prepared 8th March 2012