Administration and effectiveness of HM Revenue and Customs - Treasury Contents


Supplementary written evidence submitted by HM Revenue and Customs

HANDLING OF LARGE BUSINESSES BY HMRC

At the hearing on 11 May, Members of the Committee raised a number of questions with the Exchequer Secretary and Stephen Banyard, about the settlement of Large Business enquiries by HMRC and about the High Risk Corporate Programme (HRCP) in particular. The following notes give some background information on the Programme and then deal with the specific queries raised.

WORKING WITH LARGE BUSINESSES

With large businesses, which account for around 60% of tax receipts and up to a quarter of the overall tax gap, HMRC explicitly seeks relationships based on openness and transparency. For the 2,000 largest businesses, one-to-one Customer Relationship Managers (CRMs) ensure that HMRC has extensive understanding of tax and avoidance risks in the context of the commercial environment in which customers are operating. This supports a strong response to avoidance threats while also allowing high levels of customer service, for example through clearances.

"Real time" working, where differences of view are settled even before the accounts are finalised, is now increasingly the norm. For customers, this provides greater certainty and reduces costs. For HMRC, it gives confidence that risks are being managed up-front, at the time when there are still opportunities to change the law if necessary.

HMRC aims to prevent disputes from building up as far as possible. However, where necessary, HMRC does not hesitate to litigate, particularly on avoidance transactions which have a read-across to similar transactions by other users.

In response to the recommendations of the National Audit Office and Public Accounts Committee in their reports on the management of Large Business Service (LBS) Corporation Tax in 2007 and 2008, HMRC has focused its efforts on the most serious tax risks whilst reducing the number of minor issues taken up and resolving older issues.[29],[30] For those customers who are low risk—judged by their internal systems and controls and attitude towards avoidance—fewer audits take place. This allows HMRC to devote most resource to cases where revenues at stake are the most significant. Between 2007 and 2011 the total number of open enquiries in the Large Business Service has fallen from 7,500 to 2,700, the number of minor issues has fallen by 97% and the number of issues over 18 months old by 58%. This has allowed us to focus our effort on the bigger issues. At the same time tax under consideration[31] in LBS cases has reduced from £35 billion in 2007 to £25.5 billion in 2011 and yield from interventions in LBS has risen from £3.9 billion in 2006-07 to £5.7 billion in 2010-11.

HIGH RISK CORPORATES PROGRAMME

For the highest risk cases, which frequently involve multiple avoidance schemes, HMRC has for some years put in place dedicated project teams and sought engagement with the customer at Board level through its High Risk Corporate Programme (HRCP).

The Programme was designed initially to tackle aggressive tax behaviours by some major corporates, such as:

—  Habitual artificial tax avoidance.

—  High levels of secrecy and lack of openness and transparency.

—  Little or no Boardroom accountability for tax.

—  Very large number of open enquiries going back years.

—  Multi million pounds of tax at risk.

In addition to Board-to Board contact and active project planning, the HRCP process typically involves a period of investigation and of technical analysis and debate before decisions are taken on the resolution of issues by the High Risk Corporate Programme Board.

HMRC has seen improvements in behaviours in a significant number of cases in the Programme, including:

—  Openness and transparency and improved relationship with HMRC.

—  Boardroom accountability and engagement.

—  Movement away from artificial structures.

—  Assurance on future tax strategies.

Initially HRCP was focused on a small number of cases but the success of the approach has led HMRC to apply it more widely, and some 39 large businesses have now been brought within HRCP.

If a case results in an agreed settlement with the customer (which may cover all or some of the issues in a HRCP project) the business is not removed from the Programme until the Programme Board is satisfied that the level of risk has significantly reduced. In particular, in this post-settlement phase, the Programme Board will monitor the approach to tax planning and avoidance and ensure that the Company is open and transparent in its disclosure of tax issues.

Since it began, the Programme has resolved over 1,500 issues and brought in additional revenue of over £9 billion.

The recently introduced Managing Complex Risks (MCR) programme provides a similar multi-tax approach for large businesses outside the LBS.

The HRCP Board also governs decisions on litigation and settlement in other large business cases where tax involved is more than £100 million.

HMRC regards the Programme as having been highly successful in helping to resolve many large and complex tax issues, whilst maintaining strong governance and oversight of the decision-making process. Where issues have been settled by agreement, the key consideration for HMRC has been the strength of its case in law and the likely outcome if the matter were tested through litigation.

PARTICULAR QUESTIONS

1. Q400: Mr Ruffley:  How much tax was estimated to be at risk, before an enquiry had been completed, involving CFC legislation in each of the last three years and in how many cases was the tax at risk more than £100 million?

HMRC Large Business Service records show the following amounts of tax under consideration on CFC issues in each of the last three years:

DateTax under consideration—
cumulative (£m)
[32]
31 March 20093,791
31 July 20094,578
31 March 20113,749

Because of the risk of indentifying individual companies, HMRC is not able to provide the number of cases with more than £100 million under consideration, but the total number of CFC issues being considered by the Large Business Service was as follows:

DateNumber of open issues
31 March 2009159
31 March 2010128
31 March 2011134

2. Q401: Mr Ruffley:  How many are in the team at HMRC that deals with these high-risk corporates?

There is not a single team apart from a small central programme office. Discrete, temporary project teams are created to handle the different cases and issues that are within the Programme. The number of staff deployed on those businesses varies depending upon the size and complexity of the case and the stage it has reached in the HRCP process.

During the active phase of an HRCP process the number of staff deployed can vary between 25 and 75. There have been instances where over 100 staff or more have been involved at some stage in the working of a case. But it should be borne in mind that staff can be engaged in other HRCP cases or in non-HRCP work whilst they are part of a particular HRCP case team. We deliberately aim to retain as much flexibility as possible in the deployment of specialist resource.

This means that over the last five years, many of LBS' tax specialists have been involved in HRCP cases at one time or another, along with other technical experts and professionals (such as solicitors and accountants). This has enabled HMRC to expose them to good practice in the collaborative working of major risks, whilst maintaining careful control of confidential customer information.

3. Q402: Mr Ruffley:  The person or persons who decide finally to settle, when to settle and at what quantum to settle: who are they, what grades of officials are they?

All cases within the Programme are overseen by the High Risk Corporates Programme Board which is responsible for selecting suitable cases and for monitoring progress.

It is the Programme Board which takes all the important decisions on individual tax issues and decides how cases are settled, unless the case is so large or sensitive that the matter has to be referred to the Commissioners for a final decision. In this case, the Programme Board will usually make a recommendation to the Commissioners. The Programme Board is a very senior body chaired by the Director of the Large Business Service. All of the business areas of HMRC that have an interest in the cases are represented at Director or Deputy Director level. HMRC's Solicitors Office is also represented on the Programme Board. Current membership comprises:

Director, Large Business Service, SCS2
Director, Specialist Investigations, SCS2
Director, Corporation Tax, International, Anti-Avoidance, SCS2
Director, Solicitor's Office, SCS2
HRCP Programme Team Leader, Large Business Service, SCS1
Deputy Director, Charities, Assets and Residence, SCS1
Deputy Director, Specialist Investigations, SCS1
Senior Tax Specialist, Corporation Tax, International, Anti-Avoidance, SCS1
Head of Anti-Avoidance Group, SCS1
HRCP Team Head, Solicitor's Office, SCS1
Deputy Director, Local Compliance, Large and Complex, SCS1

The National Audit Office is currently carrying out a review of the settlement of HRCP and other large cases as part of its report on HMRC's 2010-11 accounts. HMRC will respond fully to NAO's findings and any recommendations that it makes.

4. Q405: Mr Ruffley:  The question I think arises of the numbers of officials who resign or retire, leave HMRC and then go on to work either for tax consultancies or law firms or FTSE 250 companies. Do you have the data on the number of officials who at one time or another have worked on the high-risk corporates programme or its predecessor, those who have left in the last three years and how many have gone into any of those consultancies, law firms or companies?

HMRC does not collect data centrally on all requests for permission to take up outside appointments. Requests are decided by the applicant's manager based on rules relating to outside employment set out in HMRC's Code of Conduct. The manager keeps a record of the application and decision on the applicant's personnel file.

Because of the large number of officers who have been engaged on cases within the High Risk Corporates Programme (HRCP) in various capacities, it is not possible to provide a definitive number for those who have left the Department. A number of officers are known to have left to join accountancy firms or the tax departments of commercial companies having worked on HRCP cases at some point. Tax experts recruited on fixed term appointments will naturally move to such posts on leaving HMRC as part of their professional careers.

5. Q407: Mr Umunna:  Could you provide us with the aggregate value of claims brought in court in relation to the high-risk corporates programme and the aggregate value of the sums for which those relevant cases were settled for each of the last five years?

Since its inception, the High Risk Corporates Programme (HRCP) has generated in excess of £9 billion in additional tax which was not offered by the companies in their self assessments, whilst settling over 1,500 open tax issues.

Issues are always settled in accordance with the Litigation & Settlement Strategy (LSS). The bulk of this additional yield has resulted from the settlement of issues prior to litigation coming before the Tribunals or Courts. In some cases HMRC has agreed with the customer at the conclusion of the active HRCP process that litigation should commence or continue. Indeed, in recent months, the HRCP Board has decided that litigation should commence in relation to a number of corporates across a range of issues where the total tax under consideration is close to £1 billion.

Only a handful of the issues settled (fewer than 10) have been subject to litigation in the Tax Tribunal or the Special Commissioners before the case as a whole was settled. It is therefore not possible to make the sort of aggregate comparison that has been requested. In the few cases that have been litigated during the HRCP process, some have resulted in a successful appeal by the company; in others, HMRC's arguments were accepted. In all such instances, HMRC believes that the final settlement reached was fully in line with the Tribunal's or Special Commissioners' determinations. Where HMRC has decided not to take an appeal further, this decision was made in accordance with the normal LSS process, that was, based on the judgement that a further appeal would be unlikely to succeed.

The only differences identified by HMRC, therefore, between amounts "claimed in court" and the amounts for which issues were settled in HRCP cases, have arisen directly from the decisions of the appeal bodies themselves.

6. Q413: Mr Umunna:  Now, in relation to Goldmans, there are serious allegations which have been made in the media in relation to HMRC settling this case and also in relation to Mr Hartnett in particular. Would you consider as an organisation publishing or providing to us information about that case so that the public can be assured that the proper procedures have been followed?

7. Q415: Mr Umunna:  Could you also tell us in relation to the particular case that I have raised whether the internal procedures were met in relation to the Goldman's settlement?

HMRC has carefully considered the extent to which they can answer the questions asked and have concluded that they cannot give any information, for reasons of taxpayer confidentiality.

June 2011



29   The National Audit Office report in 2007 found that 58% of issues amounted to less than 1% of the total potential intervention yield. Back

30   The Public Accounts Committee reported that in 2007 42% of enquiries were over two years old.  Back

31   The tax under consideration in an enquiry is initially estimated before any consideration of the specific facts has taken place or before applying any reliefs or allowances. It is not tax owed or unpaid - it is a tool which helps LBS managers to better direct resources. The "tax under consideration" figures given are not annual figures. They are snapshots as at 31 March each year and include some enquiries which had been open for several years. The totals fluctuate from year to year as cases are settled, as new returns come in and as HMRC's view changes on the possible outcome of enquiries, in the light of facts established and legal advice obtained. Back

32   The totals for 2008-09 and 2010-11 are taken at 31 March 2009 and 31 March 2011. For 2009-10, we have provided the figure at 31 July 2009. This is because, from August 2009, we introduced an amended definition of tax under consideration. The totals for the rest of the 2009-10 financial year are therefore unreliable as this was a transitional period where two measures were being run in parallel. See also footnote 33 for "tax under consideration". Back


 
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Prepared 30 July 2011