Evidence heard in Public

Questions 1 - 216



This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.


The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 27 June 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Jackie Doyle-Price

Matthew Hancock

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Nick Smith

Ian Swales

Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General, Paul Keane, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.


Settling large tax disputes (HC 188)

Examination of Witnesses

Witnesses: Lin Homer, Chief Executive and Permanent Secretary HMRC, Dave Hartnett, Permanent Secretary for Tax, HMRC, and Jim Harra, Director General Business Tax, HMRC, gave evidence.

Q1 Chair: Thank you very much for coming to give evidence to us this afternoon. A lot of members of the Committee want to ask questions, so in the usual way, Lin, I would be very grateful for direct and as brief answers as possible, so that we can get through the business in good time.

Have you seen the report by the judge that was submitted to the National Audit Office?

Lin Homer: No, Chair. We have seen the public Report and I was grateful to be able to sit in on your private hearing yesterday, but we have not been able to see the longer report.

Q2 Chair: Our view is that you do have the discretion-I know that this is contested-and it is also in the public interest, to enable us to have at least the background documents that you gave to the NAO, so that we can understand better the systemic issues that have been of concern to the Committee by looking at the details of the particular cases. The Committee has discussed this, and of course we would be happy to look at the documents in confidence if that is your wish, but we feel that we need access to those papers to do our job properly. Are you willing to use your discretion to enable us to hold you to what I consider to be proper public account?

Lin Homer: Chair, I’m afraid that I don’t agree that I have discretion in this area. I anticipated that we might well have this debate, and I have looked carefully at both our statutory base and your previous conversations. Our duty to taxpayer confidentiality prohibits me from sharing, unless either I do so in pursuit of my function as a commissioner, or there is specific statutory gateway.

One of the interesting things that I have discovered since I moved into the Department is that it has no common law powers over and above those given to us by the Commissioners for Revenue and Customs Act 2005. That is quite unusual. I have looked very carefully at the Act and the obligations on me as an accounting officer, which are different, and I think that we are keen to go as far as we can in sharing as much of the general information as we can so that I can fulfil my duty to you as accounting officer, but I think that the prohibition stands.

Q3 Stephen Barclay: You used the singular; can you just clarify: is it a policy decision whether tax commissioners disclose, or are you prevented in law from doing so?

Lin Homer: I believe that I am prevented in law-

Stephen Barclay: As tax commissioners plural.

Lin Homer: Yes, sorry. I was speaking personally, but it is the commissioner role that I am talking about. Section 18(1), which provides the prohibition, is disallowed in very particular circumstances, and those circumstances are set out clearly. We have to make a judgment about whether there are circumstances, but I don’t think we have a discretion.

Q4 Stephen Barclay: Could you just repeat that, Lin? You say that you have to make a judgment, but you don’t have a discretion.

Lin Homer: Yes.

Q5 Stephen Barclay: Why would you be able to make a judgment if you don’t have a discretion?

Lin Homer: We have to make a judgment about whether we are in pursuit of a function. I know that you are a lawyer, Mr Barclay, and section 18 is a straightforward prohibition. It is disapplied in very particular circumstances, and unless you can find a right to disapply it-

Q6 Mr Bacon: Can you just remind the Committee of the circumstances in which it is disapplied?

Lin Homer: It is disapplied in a range of specific circumstances. Those are set out in section 18(2) and those relate to the carrying out of a purpose of "a function of the Revenue and Customs". This is the point that I was trying to make to the Chair about the difference between the duties that I undoubtedly owe you as principal accounting officer, which are dealt with under a different Act, and our ability to be disapplied from the prohibition, which has to relate to a function as Revenue and Customs. In addition to the disapplication, there are a limited number of statutory gateways, but those are very specific. Even the public disclosure gateway is for specific purposes. I have spent some time looking at this, because I know it is an area that you were very concerned about in your previous hearings.

Q7 Chair: I think we can pursue this. I simply have to record what I think is the Committee’s view: there are at present so many question marks hanging over whether or not the settlements are in the public interest and properly defend the taxpayer’s interest, and are fair and equal before the law, that it would really help you to satisfy Parliament and, through Parliament, the public, if you were able to disclose to us, even in private-and we would keep it in confidence-some of the papers that have given rise to enormous questions about whether your Department-the Department for which you are now responsible and accountable-is really acting properly and protecting the taxpayer’s interest.

Lin Homer: Chair, I do understand that, and I hope today-and, indeed, in future circumstances-we will be able to talk about the new governance arrangements I am proposing, because I think it is critically important we have your confidence. The propositions I have put forward around the changes we intend to make are: first, based on the comments that you have made before, focusing on clearer separation of roles and on more transparent assurance, and public accounting to you of that on an annual basis, and also recognising that we should seek to put as much of the general information about what we do as we can into a more transparent setting.

I absolutely share the view that we need the public and Parliament to have confidence in what we do. As I say, I had hoped in a way that the deep review that the NAO has undertaken would have given you some comfort that we were-

Q8 Chair: No, because we haven’t seen it.

Lin Homer: Well, the Report that has been published with the evidence that you had from Andrew Park.

The point that I would make is that it should be at least clearer that we were not standing behind confidentiality because we had negative things to hide.

Q9 Chair: We will come to the details of the Report. I am going to try once more, and then I am going to move to the details. Let me say this: I welcome the changes you have made, and I think at the end of the session I’d like to spend a little bit of time discussing them.

My final point on accountability is that UK Uncut has now won the right to judicially review the Goldman Sachs settlement, so there is a real possibility that these issues are going to be disclosed anyway and discussed in open court. I think in those circumstances it seems particularly important that Parliament-before the courts-ought to be given the information that you will be forced to give in the courts.

Lin Homer: Chair, I understand that. UK Uncut has got permission to proceed. There will be a substantive hearing about whether or not there is a ground for a full judicial review, so this is not yet a move into full court proceedings1. Once issues are in litigation and in the public domain, we are then freed up from our prohibition to talk about cases. I have no doubt during the course of today, in some of the material we publish-when we were here before you last time, talking about our enforcement work-we are able to put into the public domain information that is the subject of proceedings.

Of course I’ll give you an assurance that if we end up in a position where litigation is proceeding to the substantive issue, I will ensure that the Committee is informed at the earliest moment, and able to look at the extra detail that would be public if there were litigation. But we are not at that position yet, and the giving of a judicial review number is not the same as a full hearing.

Q10 Chair: It just feels rather wrong that the judges should decide, rather than Parliament, in determining the accountability of the way in which you carry out the law in relation to what we are talking about today-big disputes. That feels the wrong way round to me. It just feels wrong. Democracy ought to ride high and be the first level at which you-

Lin Homer: I understand your passion for democracy.

Q11 Chair: I have a passion for democracy, and I don’t like to be dependent on what the lawyers will then tell us to do. I would much rather that we took it upon ourselves to ensure proper accountability, particularly in an environment where there is such distrust. You have inherited an environment where, for all sorts of reasons-because of rumours, leaking to the papers and the information we have had from whistleblowers-people inevitably, I have to tell you, do not trust the way the business is done at the moment.

Lin Homer: Understood. We are creatures of Parliament. Parliament could change our statutory base, if it chose to. You have my assurance: we will work very hard to establish the credibility I think we are owed. Everything I have seen since I joined the Revenue suggests to me that it is peopled by very professional, very hard-working people.

Q12 Chair: Suggests to you; we cannot confirm.

Lin Homer: I would like to share enough to persuade you. That may take some time.

Q13 Chair: Having gone through that, and people may want to come back to that issue a little later, can I now move and take you to the use of legal advice in the department? To take the judge’s assertion on case D, in paragraph-I hope I get this right-

Lin Homer: Page 38?

Chair: No, I think it is page 24-what the judge said about case D. I know you do not want to say it, but everybody knows it is Vodafone. Here we are: paragraph 2.30, at the top of page 24: "The Department did not seek legal advice on whether the controlled foreign companies issue should be settled, or on the terms on which it should be settled. Lawyers were not involved throughout the settlement negotiations". Do you accept that finding of the judge?

Lin Homer: I think we accept the finding that we did not seek legal advice on the controlled foreign companies issue or on the terms of the settlement, and the conclusion that we were not involved throughout the settlement negotiations. I think our position is that, over the length of a case, we believe that, when we need to, we involve lawyers at the right stages. I personally fear that we have got into a debate about what "throughout" means-does it mean every single meeting, or does it mean at points?

Q14 Chair: Okay, you were not involved throughout; you were involved at appropriate times. That is what you are saying. That is very helpful.

Stephen Barclay: That is different from the evidence given to Parliament previously.

Chair: I was going to turn to that-okay, Steve?-and then you can come in.

When Mr Hartnett gave evidence to the Treasury Committee on 16 March, he said, in answer to Jesse Norman-Question 154-"I think there are allegations that I and my colleagues stood aside, experts and lawyers, in order to reach that settlement. Not true. We escalated the Vodafone matter", which is case D, "to the very best people in our organisation, the director of our international division and one of her deputies, and"-this is the important bit-"our lawyers were involved throughout."

Lin Homer: As I said in answer to the question, and as I think the judge discussed quite thoroughly with you yesterday, our view is that we have a range of experts, and that does include our lawyers, who are involved at many stages of the proceedings-

Q15 Chair: I will read to you again the sentence: "our lawyers were involved throughout."

Lin Homer: And my belief is that that did not intend to convey that lawyers were in every single meeting. I think that what the judge has recognised is-

Q16 Mr Bacon: What did it intend to convey?

Lin Homer: I am a lawyer myself. I would have been involved more often in non-tax cases, but you would potentially be involved at the beginning, at stages and at the end, but it does not mean every single meeting.

Q17 Mr Bacon: It does mean every moment of consequence; "lawyers were involved throughout" is a very simple English phrase that the layperson will understand very easily. This is not one of those areas where a lot of angels need to do a lot of dancing on the head of a pin. It is pretty clear what "lawyers were involved throughout" means. It means that at every significant moment-at every moment of any consequence-there were lawyers involved. It means, "Don’t worry. The guys were on hand all the time," but actually we know that that was not the case.

Q18 Chair: And the term was used in both. The terms of the Report say: "Lawyers were not involved throughout the settlement negotiations". Mr Hartnett says: "our lawyers were involved throughout."

Lin Homer: We can talk about semantics, but I do not really want to. If you read paragraph 2.30, you will see that what is being said is that we did not seek legal advice on whether the controlled foreign companies issue should be settled, or on the terms on which it should be settled. What Andrew Park goes on to say is that lawyers were not involved throughout the settlement negotiations.

Q19 Chair: Would you accept that Mr Hartnett might have misled the Treasury Committee?

Lin Homer: No, I would not. What you are doing is taking a comment about the whole case, and my view is that lawyers were involved throughout the whole case. You are then taking Andrew Park’s comment about us not being involved throughout the settlement negotiations and you are saying that those two things do not accord. It is possible to see them as according. The important point that I would want to make-

Q20 Chair: I think you are dancing on the head of a pin.

Lin Homer: Well, the important point is that we have very highly specialised people-lawyers and tax experts-and, in looking at all five cases, the judge was satisfied that we generally had the right experts in the right place. Sometimes a deep expert-

Q21 Stephen Barclay: The ability of the other staff is not the issue on which we are asking the question. There are two issues referred to in paragraph 2.30. Are they material to proceedings or not?

Lin Homer: They are important, but I agree with the judge in the comment that he made to you yesterday that highly competent tax specialists may be the right people to have in at important parts of the proceedings.

Q22 Stephen Barclay: That is Sir Andrew’s view, and we note that. Can we move back to the question? You are saying that at two important stages of the negotiation, there may well have been other experts, but lawyers were not involved. Is that correct?

Lin Homer: I was not involved in them.

Q23 Stephen Barclay: I did not suggest that you were. I am asking-

Lin Homer: I am accepting that we would be content for lawyers not to be involved in all parts of proceedings.

Q24 Stephen Barclay: You may well be. I am asking not about your judgment at the time, but about the evidence to Parliament. Can we go back to the question, please? Are you accepting that at two important stages of the negotiation, lawyers were not involved?

Lin Homer: I am accepting that at points of the settlement, just as it says in paragraph 2.30, lawyers were not involved. I am not accepting that that is necessarily in disaccord with what Dave said to you. I am just trying, for the sake of clarity for the future, to be clear. We think that the judgment about when lawyers need to be involved is a matter of judgment. We do accept your recommendation-indeed, Anthony Inglese confirmed this when he was before you in the autumn-that when a matter has moved into litigation, we think, as a matter of good practice, lawyers should be involved, and that is a change we will make.

Q25 Stephen Barclay: Absolutely, but again, with respect, that is a different issue. Three times Mr Inglese said on oath, in response to Questions 579, 582 and 587, that lawyers were involved throughout. Was that correct?

Lin Homer: I think it is correct to describe lawyers having involvement throughout the case, yes. I do not take that as at every single important point. That is the difference.

Q26 Chair: Ms Homer, this is a very difficult allegation that we are making, because Mr Inglese gave evidence to us on oath. I will read you what was said in answer to questions from Stephen Barclay. Stephen said: "Did your legal team advise on whether that was the correct amount of tax due?" Mr Inglese said: "As Mr Hartnett is saying, lawyers were involved throughout, at different stages of that." Later on, when Stephen asked another question, he said: "My answer to that is as before: I can confirm that lawyers were involved throughout, but I cannot go into any more detail." Stephen says: "But who were the experts from your department that were providing the tax legal advice to Mr Hartnett?" He says: "All I can say is that lawyers were involved throughout." Any common-sense interpretation of those three assertions, which was given under oath to this Committee-and we have been criticised for putting him on oath-do not accord with the evidence given in the Report from the NAO from the judge that lawyers were not involved throughout the settlement negotiations. I cannot see any way in which you can say that those two statements are compatible.

Lin Homer: I am happy that we agree to differ. I was not at the hearing, but the words that you have just read out do not necessarily contradict paragraph 2.30. We do not have a disagreement with the judge’s finding on facts, which is that we are having lawyers involved in our cases, but that does not mean-

Chair: That is a different issue. We agree with that; that is a different issue. Our real concern is that evidence was given on oath that seems to us-

Q27 Ian Swales: Can I just say that there is also the materiality issue? It is one thing to say that lawyers were not at every meeting. Okay, maybe there was a peripheral meeting about some issue, but this comment is about the core of the settlement, isn’t it? It is not just-[Interruption.] Yes, it is not just an administrative meeting or whatever. I do think that is important. I can understand the thesis that you are trying to adopt, but there is the materiality and the importance of individual meetings and stages in the process, which I think is relevant to whether the statements are compatible.

Lin Homer: I understand. I think that two issues are getting wrapped together here. I want to try to be very clear about those two issues. One is a view that I understand the Committee holds, but which I do not think either the judge or I wholly agree with. That is-to use Mr Swales’s point-that at material or important points, lawyers should be in the room. We do not wholly accept that. Because you believe that, when you then look at a case where there are stages without lawyers, you are judging those to have been elements where you would have put the lawyer in.

Q28 Stephen Barclay: That is not the point that is being raised. The point that we are raising is regarding the evidence to Parliament. We will get on to the decision making in the course of the case. You are addressing whether it was reasonable at the point of the case. That is not the point that we are raising. We are asking about the evidence that was given to Parliament.

Lin Homer: That is the second issue. My point about the words that were used and the words that are in front of you in paragraph 2.30 is that, on a straightforward reading, you were given narrow answers in an environment where the question was how much information was before you. I do not think those are entirely contradictory-

Q29 Stephen Barclay: Are narrow answers compliant with the civil service code?

Lin Homer: I think at that stage we did not have a public record of five cases to discuss in a public environment. I understand why Anthony made the judgment that he made.

Chair: We were not actually asking for details of the cases. Stephen asked whether lawyers were involved throughout, and he replied that "lawyers were involved throughout".

Q30 Mr Bacon: I think you are right that there are two points. The first point is whether lawyers were involved throughout. The second point is whether they needed to be, or should have been involved throughout. Paragraph 2.30 says: "Sir Andrew Park noted that he could see no need for lawyers to have been involved at all stages." That is the second point-whether they should have been or needed to be involved-but the first point is whether they were involved. The evidence to Parliament was that they "were involved throughout". It was very clear. It was in plain English. It was repeated several times, and the Chair has just repeated it again. That is the issue-whether what was said to Parliament is consistent. It does not appear to us that it is.

Lin Homer: I will have another go. I think it is potentially consistent, but as I say, I do not think it is as important as the other issue. As I read paragraph 2.30, it is saying that the Department did not seek legal advice on two specific things and that lawyers were not involved throughout the settlement negotiations. It is not suggesting that they were not before, after or in between, and if one is using the term-

Q31 Mr Bacon: But these were both material-these were both highly material.

Lin Homer: Sorry, but may I finish? If one is using the term "throughout" to mean the case, not the settlement negotiations, that does not seem to me a non-descriptive or inappropriate way. What you have here is a more detailed description of a part of the process, and that-

Q32 Chair: Ms Homer, we have been around the houses. I am just going to say to you that I think you should take this away, as accounting officer, and investigate further whether somebody who accounts to you actually did mislead Parliament. We will take away and discuss what we will do, with possible reference to the Attorney-General, as to whether a particular individual, who is accountable to you, did mislead Parliament. Clearly, we can sit here batting this to and fro.

Lin Homer: I am happy that we shouldn’t waste today on that point.

Q33 Chair: Okay.

Can I move us on to another issue? If there is a global company with a UK operating unit that pays tax in all other European countries but doesn’t pay tax in the UK, can you explain to me what it is about our system that means that we cannot collect the tax that other people appear able to collect?

Lin Homer: Chair, I suspect that this is one I should lay off to one of my tax experts. What I would say is that we now carry out our tax functions in a global world where many companies operate in many parts of the globe. We seek to ensure that the very complex laws that we apply are well understood both by the companies that pay us tax and by the general taxpayer. Often, the absolute amount of tax someone pays will depend on the very particular circumstances of their case.

Q34 Chair: But the interesting question I have asked you-I accept the point about the global companies and all that stuff-is: if there is a global company that has a UK operating unit and pays tax in all other European countries but not in the UK, what is it about our system, and it is a system issue, that means that we cannot collect the tax here, but other people are able to do so?

Lin Homer: I am going to ask Mr Hartnett to try to give you an example of an explanation that would help with that.

Dave Hartnett: Chair, there could be many reasons. In the situation you describe, the UK corporate could be the main cog of a multinational group. There could be very substantial capital allowances, for example, in the UK on the capital investment. It might be an acquisitive group that, through the centre of the group in the UK, has borrowed a lot of money within our debt cap rules, so there is no restriction, and capital allowances and interest, for example, might take away all the profit. If that was happening consistently, we would be looking very carefully at that and would probably be investigating.

Q35 Chair: Let me ask you a follow-up question. If the company shows consistent profits in the UK over a number of years and then suddenly those profits turn into consistent losses, how do you spot that something may be going on, and what do you do about it?

Dave Hartnett: The very fact that there was a consistent pattern of profit that has become, I think you said, losses in more than one year-the beginning of a consistent pattern of loss-

Q36 Chair: What do you do?

Dave Hartnett: We start investigating.

Q37 Chair: And?

Dave Hartnett: See-

Q38 Chair: This is a global company, so what sort of things would you look at?

Dave Hartnett: We try to determine from the company initially, maybe by examining books and records, what had led to the change, and whether there was a change in the pattern of investment in capital assets-that sort of thing. We might, in a more extreme case, consult our treaty partners and find out what was happening in all the other countries. The core issue with a pattern like that is that we would want to know why the change had taken place.

Q39 Chair: When the same sort of company regularly briefs its investors and analysts that the UK business is positive and, indeed, particularly strong, yet the company shows consistent losses in its accounts, what do you do?

Dave Hartnett: That would be very odd if it was showing consistent losses in its accounts, but if it was showing consistent losses for tax purposes because of the sort of reliefs I have described, that would be more readily intelligible. It might not be right, but it would be more intelligible.

Q40 Chair: What would you do?

Dave Hartnett: Investigate.

Q41 Chair: And how would you reconcile the briefings to analysts and investors with the accounts?

Dave Hartnett: That would be part of our investigation. We would look at the briefings through our relationship team. My impression is that you have in mind a large corporate that would be within the large business service. Through our case relationship manager, we would start asking questions and, if necessary, we would put a team together of the sort I have previously described to the Committee to begin trying to reconcile and understand what is going on here.

Q42 Chair: What do you do to ensure that a global company, when it is using a loan mechanism-as they all tend to do to try to get their tax liabilities in low-tax jurisdictions-to export its profits in the UK, does not use the same interest rates as on loans that may be given to other European countries? That strikes me as aggressive tax avoidance. What do you do in those circumstances?

Lin Homer: In some of those cases we take action against them. There have been a number of film rights companies, such as Eclipse-

Dave Hartnett: That would be one.

Lin Homer: -where large interest payments-

Q43 Chair: That’s where individuals benefit. That’s what was in the papers last week. We are after the corporates this week.

Dave Hartnett: Can I pull apart two issues? First, there is the volume of interest. The UK tax system and the policies underpinning it see relief for interest as one of the things that makes the UK competitive. There are rules that cap it, but the UK, in terms of interest relief, is more competitive than many countries.

The second issue you raise would trigger an investigation by my Department very quickly indeed. If the rate of interest was being-if I can use a slightly loaded word-manipulated to create more relief, we would start a transfer pricing inquiry very quickly. We have some of the best transfer pricing experts in the world.

Q44 Ian Swales: Can I just exemplify the Chair’s point with a case that has been in the media? Northern and Shell, according to the media, apparently has all its debt in Luxembourg, charges interest to the UK, more or less extinguishes profits in the UK and remits the interest to Luxembourg, which is a very low-tax regime. That case has been in the media and is an example of the aggressive scheme to which the Chair refers. Clearly, you can’t talk about what you are doing in that case, but that sort of mechanism is used by many organisations. Can you give the Committee some comfort that you can do something about such cases?

Lin Homer: Chair, part of the reason for bringing Jim Harra is because, since I saw you earlier in the year, Jim has been appointed as the DG for business tax, so it is his role to take forward the relationships with big business. Would it be useful for him to outline the general approach, particularly with what we call high-risk corporations?

Jim Harra: I am glad to do so, Mr Swales. You are right that I cannot talk about Northern and Shell. I can talk in general terms about the kind of example you gave. I would break it into two parts. First, are there rules in the tax system that we can apply to protect the UK tax base from that kind of behaviour? Secondly, how effective are we in identifying where it is happening and deploying those rules?

There are indeed rules in the tax system that we can use. For example, the controlled foreign companies rules would apply. There are also rules that work both ways, to ensure that we can protect ourselves in terms of interest deductions, so there are thin capitalisation rules and the debt cap. There is a range of rules that we can deploy depending on what the group is doing.

In terms of how we identify the risks and ensure we manage them, for the largest corporates, we have a customer relationship manager, who in effect man-marks that corporate and everything it does. We expect the customer relationship manager to know everything about the business, its behaviour in relation to tax, the briefings its gives to analysts, for example, and identify all the risk that that corporate poses to us, and ensure that the right specialists in HMRC are brought together to manage those risks.

Q45 Ian Swales: In the type of example I cited, do you track where the debt actually came from? For example, if it originally came from the parent company, there is clearly some kind of back-to-back transaction going on, which ought to have back-to-back interest payments I would have thought. Do you go into that level of detail in a case of that nature?

Jim Harra: Absolutely. We go into loads of detail and we gather lots of information. Sometimes you are able to trace through what is happening. Other times, particularly with money, it is difficult to trace actual money because it is fungible, so the rules provide some rules of thumb that mean that you do not always have to be able to trace things through.

Q46 Chair: I have to say to you that I was not thinking of that case; I was thinking of Vodafone, and the article in Reuters. If you read the principles coming out of the particular, all those principles hold good. This is a company that pays tax in all other European jurisdictions but does not pay tax in the UK. It is a company where the cost of the product base-I did not deal with that issue-in the UK is much higher than the cost base elsewhere, and is going up at a faster rate than the cost base elsewhere. It is a company where the interest rates on loans are much higher than elsewhere. It is a company that regularly briefs investors and analysts-according to Reuters, which is reputable; I do not think the author of the article would have gone into print if he was not pretty confident-that its UK business is positive and, indeed, particularly strong. We know that it is one of the cases that were investigated by the judge, and it seems to me that you have not pursued Vodafone properly; you have actually let them off a lot of tax.

Chris Heaton-Harris: Chair, can I just say that we have a statement from Vodafone in front of us on our desks, where they say that they pay £700 million to the Exchequer in payroll taxes, business rates, VAT and so on?

Chair: Payroll taxes are different, Chris.

Chris Heaton-Harris: Yes, I know, but there is a bit of balance to be had.

Chair: Okay, but payroll tax is different. They do pay their payroll tax, VAT and property rates; I accept all that. The issue before us is really corporation tax. I accept that we need to get the balance right, but at a point when everybody is talking about "morally repugnant"-or otherwise-behaviour, it is very difficult to understand, if anything in the Reuters story is true, why this has not been more vigorously pursued.

Lin Homer: Chair, we will keep returning to the fact that we do not come before you to talk about individual cases. I would say generally that the business tax division of HMRC, which deals with the largest companies and their tax affairs, generates 60% of the tax that the country takes in. We collect £470 billion a year-

Q47 Chair: That is just not the point. The point is that each individual taxpayer is dealt with fairly before the law, so that all the other taxpayers and all the small businesses in the community feel that when they pay their tax and they are pursued by you to the nth degree, everybody is treated equally before the law. When you read about Vodafone-I know that you cannot discuss Vodafone, which is why I asked you in a systemic way-you think, "Goodness. There is something really, really wrong in the way that we deal with these big corporations."

Lin Homer: We share your concern that the public will worry about whether tax is even-handed, but we do not believe there is anything about the way we deal with any cases that is less than fair and even-handed. We seek to apply the same laws in ways that are appropriate to the cases in hand. There is an extent to which you have different tools and techniques for different circumstances. It would be impossible for us to have a customer relationship manager for every small business, but in just the same way as we do with big business, we work very hard with small businesses to help them pursue a successful economic undertaking while keeping their tax affairs in order.

Q48 Matthew Hancock: But on the question of having relationship managers for big businesses, many small businesses will say that they struggle to get on the phone to HMRC. Of course, it is beneficial to ensure that these procedures can happen more easily. As an example, Vodafone’s argument is that it paid a large amount for the 3G spectrum in 2000, and its interest charges on the debt that it took on to pay for the 3G spectrum are very high. Are you saying that the customer relationship manager with Vodafone would therefore take that into account in the way that they agree the appropriate tax bill for Vodafone?

Lin Homer: Not at all.

Q49 Matthew Hancock: What; they would not take into account the amount of interest paid by Vodafone?

Lin Homer: That Vodafone is good for their country-in the wider economic interest.

Q50 Matthew Hancock: No, the specifics of the Vodafone case.

Jim Harra: Again, if I can generalise, away from that particular company. When we see a multinational group that is apparently paying less tax in the UK than in other countries, we would expect the CRM to understand the reasons why that is, and to understand why they are good commercial reasons that do not involve any tax planning or, if they involve tax planning, whether there are risks that we need to counter through the rules that we have.

Q51 Matthew Hancock: Okay, and how is the CRM held accountable? If you are working as a public servant closely with a company, it is critical that that relationship remains professional, and therefore that if somebody is specifically assigned to a company, they hold that company’s feet to the fire in the way that they would any other. So how are they held to account?

Lin Homer: This is where I wanted to go with our general governance. Obviously Jim, within his area of the business, will have supervisory steps in place to ensure that people have the right skills and confidence that their work is being checked. However, in addition to that-very much in response to some of your earlier comments-we are now moving to a situation where we are strengthening the overview that we give, particularly to big cases. We are also, very much at the Chair’s behest, dipping into some smaller cases to have, through our tax assurance commissioner, a view looking at those purely from an assurance perspective-so outside Jim’s line of business, not involved in the day to day. That will give us a sightline that will allow us to satisfy ourselves that our people have the right skills, that they are applying those correctly, and that we are getting the right results. That is very much in light of the new governance.

Q52 Matthew Hancock: Having an extra commissioner to whom they are accountable will be effective only should they make a decision or recommendation that is too close to the company’s interests, as opposed to being truly impartial-that their feet are held to the fire in a pretty heated way, if that does not push the analogy too far.

Jim Harra: Just like me, as a tax inspector, my customer relationship managers are tax inspectors as well. They get out of bed in the morning to collect tax-that is what they are there to do. They involve all the specialists they need in assessing and managing the risks, so it is not one person working on a case all by themselves. We compose case teams to work on the issues. You bring in the CFC specialists and the transfer pricing specialists, depending on what the issue is. We have governance monitoring the decisions that are made, depending on the size of the issue. We also have a policy of rotating our CRMs so that they do not stay on one case for a very long time. It is important that they stay there long enough to get to know the business thoroughly and so that they can use that knowledge to help HMRC, but we also periodically move our CRMs around.

Q53 Nick Smith: Can I follow on from what Matt just asked, because I want to query something? I have not seen the information that Vodafone has sent to some colleagues, and I just want to try and understand it a bit more. The suggestion is that the cost of the interest that Vodafone pays for the 3G licences has been offset against the tax that we have been receiving from it in recent years. Is that what has occurred, or what Vodafone is saying?

Jim Harra: Again, I cannot talk about Vodafone, but as a general rule in the UK tax system, there are pretty comprehensive tax reliefs for payment of interest.

Chair: Did Vodafone buy any spectrum in other countries?

Matthew Hancock: Yes, but if you remember, our auction was right at the top of the market-

Chair: Everybody was selling off spectrum all over Europe, were they not?

Matthew Hancock: The argument is, to quote from Vodafone: "Factually, this is because no other European business, with the exception of Germany, had to pay anything like this amount to their respective governments for access to 3G spectrum."

Fiona Mactaggart: And the process was presumably done in a way that advantaged the taxpayer.

Q54 Nick Smith: I just want to try and understand this a bit further. When they bought the licence, was it understood that they would have a "don’t pay later" discount further down the road? Is that the norm? When the purchase was made of these licences, was it understood that they would have that "don’t pay later" discount?

Jim Harra: It is the norm that when a business borrows to invest or to buy a business asset, it receives relief for the interest.

Lin Homer: And we apply that policy.

Q55 Mr Bacon: From what Matt was saying earlier, the individual John Connors, who was a senior HMRC official, had a role in relation to large business tax. What was his final job at HMRC?

Lin Homer: I’m afraid I do not know.

Q56 Mr Bacon: But it was large business tax, was it not?

Dave Hartnett: It wasn’t operational, Mr Bacon.

Q57 Mr Bacon: What was it?

Dave Hartnett: He was the director of the large business customer unit, so he was-

Q58 Mr Bacon: What does that mean?

Dave Hartnett: I was just about to say. He was developing strategies for how we related to large business and how we involved with them. He would be advising on policy issues, compliance structures and that sort of thing.

Q59 Mr Bacon: The Reuters piece says: "Vodafone boosted its tax team in 2007 by hiring the head of the HMRC unit that dealt with large corporations, John Connors."

Dave Hartnett: That is not correct.

Q60 Mr Bacon: He did not deal with large corporations.

Dave Hartnett: He did not deal with large corporations.

Q61 Mr Bacon: He did the policy in relation to large corporations.

Dave Hartnett: That sort of thing, yes.

Q62 Mr Bacon: And then he went to Vodafone.

Dave Hartnett: Yes.

Q63 Mr Bacon: Was there a gardening leave period between his leaving HMRC and going to Vodafone?

Dave Hartnett: I think there was a short period, but there was a very specific consideration, as there would be with anybody, as to whether that was a proper thing to do.

Q64 Mr Bacon: How long was the period?

Dave Hartnett: I would have to look. I am sorry, I cannot remember.

Q65 Mr Bacon: What would normally happen? You have a large number of staff. There are tax experts whom companies would want to hire. What would be normal?

Lin Homer: It will depend on the circumstances. If you look generally, quite a large part of the profession-

Chair: If someone is working with the big business set and goes off-a poacher turned gamekeeper-

Mr Bacon: Can you make the phone call to find out while we are voting?

Sitting suspended for Divisions in the House.

On resuming-

Chair: Okay. We’re on to Steve, if you are ready.

Q66 Stephen Barclay: Can I turn to company D, which most people accept is Vodafone but I understand you want to refer to as company D?

When you made the assessment ahead of the settlement of what tax the company was liable for, what time period was that covering?

Lin Homer: Can I check? Is this the point you discussed yesterday about whether future issues were involved?

Q67 Stephen Barclay: I want to come on to that, but I am not there yet. I would like take an earlier step which is, ahead of your settlement or negotiation with company D, I assume you made an assessment of what you thought they were liable for?

Lin Homer: Yes. The principles that we apply in the cases that we put through our litigation and settlement strategy are that we seek through the work we do with the organisation to establish the right amount of tax that is owing, then we seek to settle for the level that we believe we are due. So a judgment is made as to what that amount is. You have to accept that that may not be a figure that you start with and then stays constant all the way through, because what happens is that you do the discussions-

Q68 Stephen Barclay: Of course, in a negotiation the figure will not stay the same. With respect, Ms Homer, it was a very straightforward question. If I may, I will repeat it. When you made the assessment, as your starting point in the negotiation, as to what tax you thought that company D was liable for, what period did that assessment cover?

Lin Homer: Up to 2008.

Q69 Stephen Barclay: When you settled with the company, what period did the settlement cover?

Lin Homer: The settlement covered that period.

Q70 Stephen Barclay: What settlement was reached with the company in respect of the period post-2008?

Lin Homer: I am going to have to refer that one to Dave, because I think this is the conversation you were having yesterday, when I think both Amyas and Andrew Park were unsure about what was in and what was not-that was the question I was trying to ask you at the beginning.

Q71 Stephen Barclay: Which you knew about yesterday, so I assume Mr Hartnett had a chance to check that.

Dave Hartnett: The position, Mr Barclay, was that, provided there was no change in the CFC position from the position at 2008, the three years of ’09, ’10 and ’11 would benefit from the CFC exemption1.

Q72 Stephen Barclay: So you would not claim tax over ’09, ’10 and 2011.

Dave Hartnett: Can I just be slightly picky, but I will do it very quickly? I do not think that we ever committed not to claim tax-

Q73 Stephen Barclay: No, because you cannot bind yourself. But you indicated to the company that you were inclined not to claim tax for those three years.

Lin Homer: If the logic that we had applied in reaching the settlement stayed-

Stephen Barclay: All things staying equal.

Lin Homer: Then it would stay through the next three years.

Q74 Stephen Barclay: When you came to that decision, did that include an assessment, and was it documented ahead of reaching that decision, as to what you thought the tax liability would be on the two controlled foreign companies operating in Luxembourg-the one dealing with the European investments and the one dealing with the US investments? Did you break that down in one of the documents you prepared ahead of the settlement?

Lin Homer: Yes, I am slightly concerned that we are reaching the kind of territory that would have been better discussed in a private hearing.

Chair: Are you telling us that you would be willing to give us that information in private?

Q75 Stephen Barclay: I have not asked what the amount was. I am asking, with respect, about process. I am asking to what extent-

Lin Homer: If we are talking about procedure, I am happy that we should try to answer.

Q76 Stephen Barclay: If you are saying, "All things staying equal, we will not take tax for future years", I am trying to understand what, in coming to that negotiated position, your assessment was beforehand and whether it was documented and broken down, as it applied to, specifically, the two Luxembourg foreign controlled companies.

Dave Hartnett: The answer, Mr Barclay, is in paragraph 49 of the NAO Report.

Stephen Barclay: Yes.

Q77 Chair: Could you say that again?

Dave Hartnett: The answer, I think, is in paragraph 49 of the NAO Report.

Q78 Stephen Barclay: No, that says that it was, "considered". I am asking if you documented anywhere-

Chair: Read it out so everyone knows what we are talking about.

Stephen Barclay: Mr Hartnett?

Dave Hartnett: Paragraph 49 says that there were "subsidiaries…in the same country as subsidiary D. The Department…considered whether the controlled foreign companies provisions applied to" those, but put simply, Mr Barclay, we considered Luxembourg and it is documented.

Q79 Stephen Barclay: I would not begin to think that you did not consider that-it would be so glaring an omission.

Dave Hartnett: I think so.

Q80 Stephen Barclay: Once again, with respect, that was not the question.

Dave Hartnett: Sorry, I thought-

Q81 Stephen Barclay: I am asking about the process. Did you document, ahead of the settlement negotiation, an estimate of what you thought the tax might be in ’09, ’10, ’11 for the two controlled foreign companies operating through Luxembourg?

Dave Hartnett: We will have to come back to you for a simple reason: as I explained at a previous hearing, the work was being done by our most senior experts, and I want to check. I would be guessing if I gave you an answer to the question now.

Q82 Stephen Barclay: I raised this yesterday-Ms Homer was in the hearing-about my concern around the forward element of it. We have not got the note that was prepared at the time.

Lin Homer: I was in the hearing yesterday, and my understanding was that you were asking questions about the generality of whether future issues were involved. That is what I took it to be. That is why I was trying to get some understanding. I am very happy that we will give a note to Mr Barclay.

Q83 Stephen Barclay: I am trying to understand how you made a determination of what the tax liability would be for 2011. How was that assessment made, other than Vodafone, as part of a deal, saying, "This is as much as we’re prepared to offer. Take it or leave it."? I am trying to get to your assessment and how that was documented and assessed prior to going into the negotiation.

Lin Homer: What we are trying to do is explain a procedure to you, and the procedure that we followed was to make a judgment on the type of tax position the company was in with relation to subsidiaries, and then make a judgment about the tax owing as a result of that. It seems to me that we are describing to you a process by which we reach a position on tax due which then leads to an application. That is not the same as trying to forecast profits, and that is the bit that we are in some disagreement about.

Q84 Stephen Barclay: You cannot take tax on an arbitrary basis, can you? So are you satisfied that all aspects of that forward element were compliant with the al-Fayed judgment?

Lin Homer: We are satisfied that the comment made that if all things stayed the same-if the judgment we made on D was right, it would remain right for the next three years.

Q85 Stephen Barclay: With respect, I would have thought that that was fairly yes or no-either it is compliant with al-Fayed or it is not. I understand that you made it on the basis of things staying the same, but the point with al-Fayed was that things did not stay the same.

Lin Homer: Then the only decision we made was if they stayed the same. I’m sorry, we keep going round and round. We think our position is quite simple-quite well described by the judge. If the judgment we are making is the proper judgment, and if the circumstances remain the same, it will remain the right judgment in future. That is a policy point, if I can put it that way, not a judgment about amounts that are traded off. We are not in the same place about the procedure that was being followed.

Dave Hartnett: Mr Barclay, can I clarify one point in relation to al-Fayed? What we did not know, when we were looking at the motive test for the purposes of CFC exemptions, was what the 2011 profits would be. I agree with you entirely that had we guessed or looked into the crystal ball at the profits for 2011, we would have been in real difficulty in relation to al-Fayed, because we alighted on a number, which, I think I can fairly say, would not have been right, because we would not have seen the material to let us do that. So that is how I differentiate this completely from al-Fayed. I just want to make that point clear.

Q86 Stephen Barclay: So why did you include 2011 in the settlement?

Dave Hartnett: We included the application of the motive test, as Lin has said. I should stop, because I am only going to repeat what was said. I apologise.

Q87 Stephen Barclay: In your view, when you said to Mr Love on 16 March 2011, "We did not collect a penny less from Vodafone than we thought we could", were you referring to what you thought in the negotiation or were you referring to what you thought when you entered the negotiation?

Dave Hartnett: I am not going to be able to give you an answer, either/or, on that basis. What I meant was that we resolved the cash payment for the greatest sum that we believed we could get. There were issues around potential infraction and the risk of losing the case. It was all of that that I had in mind at the time.

Q88 Stephen Barclay: Sure. I am not a tax lawyer; I do not understand, with respect, Mr Hartnett, your answer. Clearly, the amount that you thought you could get changed from the start to when you settled, because there was a negotiation and a deal was reached. I am trying to clarify, again in terms of the evidence to Parliament. When you said, "We did not collect a penny less from Vodafone than we thought we could", at what point are we referring to?

Dave Hartnett: I was referring to the amount of cash we were collecting. That was the maximum amount I thought we could collect.

Q89 Stephen Barclay: Sure, but that changed over time, did it not?

Dave Hartnett: Not really. As I have explained to the Committee before, I came in quite late to this. The discussions about an amount had been going on for-from memory-four months. My answer to Mr Love was intended to convey that we collected no less than we thought we could.

Q90 Stephen Barclay: In your answer to Mr Norman-Question 175-you said, "We looked at the position; we did our calculations during the negotiation", which suggests that the point to which I am referring was during the negotiation. What I was trying to establish earlier was what you thought when you entered the negotiation.

Dave Hartnett: Let me try and help again. When the then Director General for Business Tax and I were in the final negotiation-if I can liken this to an elevator for a minute-we were going up, not coming down. There was a proposal on the table and we wanted more.

Q91 Chair: But you had a sum in your mind, which was way above-you do not start with a proposal on the table and presumably start, as you have said in your evidence to the Treasury Committee, "We did our calculations...and we reached what we thought was the right number." Presumably, that is the number that you thought should have been owed.

Lin Homer: This was a point I was trying to make about the litigation and settlement strategy. The strategy-again, Andrew Park said yesterday that he thought the strategy in some ways was more rigid and gave us less discretion than he might have thought was wise-is set out in such a way that we go into the discussion seeking to establish information to support our position, but we settle for the amount that we think the Revenue is due. We do not settle for a lesser amount than we believe we would reasonably expect if we litigated. That is our position. There was some debate yesterday between yourselves and the judge about whether or not we were negotiating and reaching a view, but our strategy is clearer and sharper than that.

Q92 Chair: But how can you decide that, Lin, if you don’t take legal advice? It’s quite extraordinary-the whole thing. It’s the more general point. Some of these deals are for billions-the one for Vodafone is billions. You don’t take legal advice and then you tell me to believe that you think you will lose the point in litigation. It is an incredible position.

Lin Homer: Let me respond to your question then. First, we find out, by having a dialogue which often includes quite significant disclosure, so that we end up with more information to make that judgment. Secondly, we reach that point by using the expertise that is appropriate. Again-I have to say that I am in the same place that Andrew Park was-that will sometimes be legal knowledge, sometimes deep technical knowledge, and sometimes generalist knowledge. I think the comment that the judge used yesterday was, "I think we’ll have to differ with you on this. I think a highly technical tax professional is often going to be the right person to make those judgments".

Q93 Stephen Barclay: What is odd about this is, not only did you not seek legal advice prior to reaching the settlement-that is what paragraph 2.30 addresses-but you did not get sign-off afterwards, as paragraph 2.41 makes clear, even though it met the criteria requiring sign-off. It seems extremely odd that both beforehand and afterwards you failed to follow procedure.

Lin Homer: I have already indicated, Chair, that on the governance issues, I accept the clear guidance that NAO and yourselves have given us-

Q94 Chair: The NAO didn’t-we did.

Lin Homer: You gave us-my apologies, I was sharing the credit.

The guidance you have given us before was that our protocols and our role separation should be clearer, and that HMRC needs to have more tax professionalism at the top of its organisation. Those are all points that were well made to us, and my propositions to you intend to take those points. I would accept Mr Barclay’s point that we should, more consistently, be clear about what our governance is and stick to that. Your debate yesterday about whether there was specific or ad hoc governance is a criticism fairly made of us that we would seek to improve.

Chair: No governance.

Q95 Mr Bacon: Just on that last point, you were specifically referring, Ms Homer, to the point that I was making yesterday. I was saying not that there was ad hoc governance but that the NAO Report on your accounts, 2010-11, stated in paragraph 2.28 on page R27 that in "four of the largest settlements we examined, the Department operated specific governance arrangements". My question had been in light of the subsequent NAO Report, which said, in paragraph 2.42 in relation to case E, that "Unlike those four cases, the Department did not set up specific governance arrangements". It is clear from reading those two that in the four earlier cases, the Department set up, at least if you take the reports and the words on the page at face value, specific governance arrangements that were different from the governance arrangements that would otherwise have applied. Some of the things that might have been done under the other governance arrangements, such as referring a settlement to a high-risk corporate programme board if it met the criteria, or separating negotiation and sign-off and so on, were not done under, as it were, these other governance arrangements that were set up. My point was that there weren’t any governance arrangements set up, so to describe them as ad hoc suggests that they existed in some form or other separate from the normal ones. My point was that they did not exist, did they? It was just a case of skipping some of the rules because they were inconvenient.

Lin Homer: I do not agree with that at all. "Ad hoc" was a phrase used by the Committee, so my apologies if it was not you who used it. The position that you discussed yesterday was that we did not put all of these cases through our high-risk corporate panel, for instance. We did not have a separation of commissioners involved-

Q96 Mr Bacon: But you operated specific governance arrangements. You would have seen a draft of these accounts before they were published, wouldn’t you, thus the wording, "The Department operated specific governance arrangements"?

Lin Homer: This is this year’s accounts?

Mr Bacon: This is the 2010-11 HM Revenue and Customs accounts-

Lin Homer: That is last year. I do not read every Department’s accounts, and as I was not here last year I did not.

Q97 Mr Bacon: None the less, my point surely stands, that "the Department operated specific governance arrangements" was a phrase that the Department would have seen.

Lin Homer: What is clear to me is governance arrangements were in place. They were not in accordance with our normal protocol, and I am accepting your point that we should not have arrangements that are laid out and then are not followed. My proposition, which I have shared with you and which we will put into effect from now on effectively, is that we will follow those more rigorously. We are partly going to be able to do that because I am going to strengthen the number of Commissioners with tax professionalism. The point the judge made, which I really do want to emphasise, is that although the governance in these may have been more ad hoc, or not have followed every single stage that we would normally have expected, the outcomes were reasonable or more than reasonable. My view is we got some good outcomes, but not in as-

Q98 Mr Bacon: That is a sort of "never mind the quality, feel the width" argument. You said there were governance arrangements in place. I want to know what were these governance arrangements in place that missed out these various other points. What were they? Were they written down?

Lin Homer: They did include escalation, they did include checking-

Mr Bacon: Were they written down? These governance arrangements that were set up, that were operated, were they written down?

Lin Homer: I think the discussion yesterday indicated-

Q99 Mr Bacon: Well, it was unfortunately in private so the members of the public cannot share that, which is why I want to reprise it.

Lin Homer: I want to repeat what I said in my letter of 27 February-we accept that the governance that should be applied to these cases should be within the protocols that we are going to publish. We accept that that should be audited. In answer to one of your questions yesterday, the judge said that people do sometimes make mistakes and he kindly indicated that he had done so in his lifetime. One of the things that we will do is account to you if any of our procedures do not follow the norm-

Chair: We know you are accounting all the time, Lin, but we just don’t know. You are telling us you are, but we only know all about this stuff because we got whistleblowers.

Q100 Ian Swales: I just want to point out, because we have the transcript from yesterday, it was the judge himself who first used the word "ad hoc" in describing the-

Lin Homer: I apologise.

Ian Swales: I just wanted to get that on the record, because I think it is quite important that it came from him, in terms of his observations.

Lin Homer: I was trying to describe the general situation.

Q101 Mr Jackson: For the sake of good order and transparency, I should declare that my wife is an employee of Northern and Shell. That needs to be put on the record.

We need to make the point, Ms Homer, that you are praying in aid the 1989 legislation in order to invite us to accept the reasonableness of this report. Can I just put it in context? We had a private session yesterday which was circumscribed in the extent of what the expert witness could say. We had a situation where we are being asked to discharge our responsibilities in terms of value for money, but you have made reference to statutory gateways in terms of public interest, but you have given no examples of that. You have given no examples of the specific legal precedents or cases that we could rely on. Your Department has pursued a policy of exceptionalism with these organisations, in that you have moved away from accepted protocols. There have been administrative errors, which the judge conceded in his report. There have been legal errors, in that legal advice that should have been sought has not been sought.

We as a Committee have not seen the details because of the catch-all point of disclosure and confidentiality incumbent with the legislation, and we do not know about the capacity and capability issues of your very senior lawyers and tax advisers, and whether they are proficient enough, skilled enough or experienced enough to take on the sort of very accomplished and well-paid tax lawyers employed by Vodafone and company E, whose name we all know. So you can see from our point of view that it is very difficult for us to give carte blanche to your point that we should be reassured that everything is fine. Frankly, we cannot make an informed and intelligent decision, because we do not have all the facts.

Lin Homer: There is quite a lot in there. Taking your earlier comments, Chair, it is probably unwise for me to try to unpack every point that Mr Jackson has made, but to take just a few of those, the 2005 Act, as I tried to explain earlier, circumscribes our rights as Commissioners. Section 20 is the section dealing with public disclosure. It is not a general right; it is a specific right laid out in the subsections that follow. Section 18(2) disapplies the prohibition. Again, it is very specific. As I said to you earlier, I can find no evidence that we have any common law powers that take us beyond our forming statute.

I owe you a different duty, and I am very serious about that, and that is as accounting officer to you as a parliamentary Committee. That is governed by the Government Resources and Accounts Act 2000, which requires me to prepare resource accounts-I have signed this year’s, and I understand Amyas has also now signed them-and to account to you transparently, with integrity and to the best of my ability. I will do that, but that is not the same, in my view, as simply opening all of our documents to you. I have no desire at all to be disrespectful, but my view is you are no better placed to judge the capability of my tax experts than a judge or than the people I have at the top of my organisation. My duty is to show you that I am managing the resources given to me with care, and I intend to be-

Q102 Chair: We were elected.

Lin Homer: I appreciate that, and I am-

Q103 Chair: We were elected, and we have duties out of that to the people who elected us.

Lin Homer: I understand that, and I am very keen, within the powers that are given to me by the statute as a Commissioner and my responsibilities as accounting officer, to be as full as I can with you about general information. What I would disagree strongly with Mr Jackson on is the capability of our organisation.

Q104 Mr Jackson: I am asking you a question. We are not in a position to make a value judgment on the efficacy of those individuals, because we don’t know about them.

Lin Homer: Right. Well, I am very happy to try to give you more information about the generality of our numbers, the way we train people and the way we check them, and would be delighted to open up more of the information.

Q105 Chair: None of your lawyers, for example, in the evidence we had, were tax lawyers.

Lin Homer: That is not true. We have a number of lawyers who are tax experts.

Q106 Stephen Barclay: No, it is the top four: the general counsel and his three direct reports. The four most senior lawyers within HMRC are not tax experts, and until recently, only one of the tax commissioners-Mr Hartnett, as I understand it-actually has a detailed knowledge of tax. As we know from the Vodafone settlement, two tax commissioners went along, got it wrong and then did not refer it to anyone else for sign-off. I cannot refer back to our private session yesterday, but the point is that I do not think that this Committee is suggesting that members of your Department do not have tax expertise; I think that there are many very well qualified and expert tax professionals within HMRC. The frustration of this Committee is that key decisions, important decisions, were taken without the benefit of their advice.

Lin Homer: That is not true. Key decisions were taken in the Department with the benefit of advice. That advice does not necessarily constitute the same people at every stage of an affair.

Q107 Chair: But you took the technical-

Lin Homer: We took a technical decision with senior experts.

Q108 Chair: But you took the technical people off. Mr Hartnett went into the driving seat with people who did not know the technical detail.

Lin Homer: That is not true.

Chair: That is what is in the public domain. We can’t judge it. That is our view until we have evidence.

Q109 Stephen Barclay: You didn’t take a note of the meeting. It would have been helpful if the Department took a note of the meeting. You actually rely, in the case of Goldman Sachs, on the meeting note provided by the taxpayers. It is quite a remarkable state of affairs. You phone the head of global tax from Goldman Sachs and get him to fly over from the States to a meeting of such importance that you are addressing-we will come on to Goldman Sachs-a number of issues, but you don’t even take a file note.

Lin Homer: I will say again that it is not true that these decisions were taken without experts in the room.

Q110 Chair: Experts with knowledge of the details of the case?

Lin Homer: Yes there were, in all these cases. What you are referring to are some of the more junior experts.

Q111 Chair: But they may have known the details of the case as well. I know, from my time as a Minister, that it was often the grade 7 who knew what they were talking about, whereas the senior person would not have known the details. You know that, as a senior civil servant, and I know that, as a Minister with some experience.

Lin Homer: I certainly am not planning to hold myself out as a tax expert, so let me be clear about that. But we had tax experts in the room.

Just to Mr Barclay’s last point, I would accept that it would be good practice to keep a record, and it is my intention-

Chair: Essential practice.

Lin Homer: I am a lawyer. I sat in this hearing yesterday and I was making notes. We accept many of your governance points; I just want to be very clear about that. There were some very strong pieces of advice to us-about role separation, sufficiency of tax expertise and assuring our system by some independent review-that we are keen to take forward.

In addition to that, as the new person at the head of the organisation, it is my intention to strengthen the amount of tax professionalism at all levels. By the middle of the next week, when I have concluded a series of appointments that I have to make-as you have pointed out, we are losing some really significant experience from the top of the organisation-I expect to change the ratio that Mr Barclay referred to, where one out of five of the key commissioners are tax-qualified, to at least three, if not more.

Q112 Chair: And the top lawyers?

Lin Homer: I think we already have changed in relation to the top lawyers, but I would make the point you make, that you don’t always have to have the most senior person to be the most qualified.

Q113 Chair: As long as you consult the junior person who knows what they are talking about. But you don’t-you exclude the junior people.

Lin Homer: That is not true.

Q114 Fiona Mactaggart: On this specific point about junior staff, I was so struck by the report of the judge-he kept saying that he had never run a big organisation and that he was not a management person-and the extent to which the information he gave us kept reflecting that one of the problems he perceived in the system was the alienation of your own staff from how it had worked. It just was chronic throughout the whole thing. I was surprised to see that.

Lin Homer: Paragraph 12 of the summary of the report picks up that point. It says that we "did not always ensure that the specialist staff"- that is the more junior ones you are talking about-"involved in the case understood the reasons for settlement." It goes on to say that this "resulted in a loss of confidence in the settlements". We have accepted that we have to do more to maintain better communications. The point that I am trying to make is that there is much in the work that you have done that we find should lead to changes in our procedure. I am trying to distinguish those from the points where I am disagreeing with you. That is fair criticism that we accept.

Q115 Mr Bacon: It is one thing to say, "Yes, there have been some mistakes, and we’re going to change our procedures", but part of the issue is that you had procedures, you just didn’t follow them. That prompts the question, what good will the new procedures be unless you follow those? Hopefully, that might be possible because they are more aligned with the reality of the world and are therefore more sensible and easier to follow. It is fairly obvious from what has been going on here that the very discussion about a negotiation would not be possible if you adhered strictly to your litigation strategy which talks about not splitting the difference. Actually, you have a negotiation, and in the end you assign a value to everything, you come up with a number, and then you negotiate. That is what happens, isn’t it?

Lin Homer: On your first question, I have no doubt that I will be back in front of you on numerous occasions so that you can check whether the proposals I am putting to you are put into effect. That is the duty that I owe you as accounting officer. On your second point, the word "negotiation" is used by the Committee, not by us. We reach a settlement.

Q116 Chair: What’s the difference?

Lin Homer: The difference is very important.

Q117 Chair: Go on, explain it.

Lin Homer: The difference, and I referred to this earlier, is that we are trying to determine the right amount of tax due. If we do not think what’s on the table is the right amount of tax due, we litigate.

Q118 Chair: Hang on a minute. You let Goldman Sachs off tens of millions of pounds. We don’t know the-

Lin Homer: That’s your view.

Q119 Mr Bacon: No, it’s the Report’s view. I refer you to page 24, paragraph 2.31, on case E, which says, "The Department should, therefore, have obtained legal advice before reaching a settlement, but it did not do so." I wanted to come on to-

Lin Homer: That is a different point.

Q120 Mr Bacon: It speaks to your point about the right people being in the room, because in relation-

Lin Homer: Only if you went on to accept that settlement E was not good. But the same person who wrote that paragraph said that settlement E was good. You cannot dissociate the views of a person-

Q121 Mr Bacon: Hang on a minute. You have admitted yourselves that there was a financial error in relation to case E.

Lin Homer: We did.

Q122 Mr Bacon: In the Goldman case, the people in the room were Mr Hartnett, the head of banking sector and large business service and the relationship manager for Goldman. The people who were not present were those who knew that interest should be charged, and that there was no impediment to charging interest. Indeed, Mr Hartnett didn’t know that HMRC had warned Goldman that interest would remain payable in a letter written in October 2005 until I told him. He said as much on the record, so there is no point in shaking your head at that one, because-

Lin Homer: I was not shaking my head at you, sorry.

Q123 Mr Bacon: Oh good; I’m sorry that I misinterpreted your waggle of your spectacles.

In the case of Vodafone, the people who were in the room included Mr Hartnett and Mr Cruickshank from Deloitte, whom we believe was introduced to Vodafone by Mr Hartnett. The people not present were the controlled foreign corporation specialists, and curiously, the relationship manager for Vodafone, although the relationship manager for Goldman Sachs was present at the other meeting. I simply am unable to accept your earlier statement that the right people were always in the room. They weren’t.

Lin Homer: I am not prepared to discuss individual cases in the public hearing; we said that earlier.

Chair: But then you can’t make the assertion that-

Q124 Mr Bacon: But you just did, Lin, because you said that the right people were in the room.

Lin Homer: I am not prepared to discuss one by one the people who were in the room. We do not accept your account of that meeting. The point that I am trying to make as a point of principle is that we settle for the amount that we think is owed.

Mr Bacon: Can I just point out that Mr Hartnett did say-

Lin Homer: I am being succinct, but I think that I am entitled to try to finish my answer.

Whether you use the word "mistake" or, as the judge did, "confused", it has been accepted that what was in people’s minds at the point that judgment was made was a mistake. My point is that that is not the same as a negotiation. This is a very fine, but very important point. We thought that we were settling for the amount that we would get if we litigated. The fact that, subsequently, the debate about interest came to light does not change whether that was a settlement rather than our thinking "We’ll give up the interest, because we know it’s due, but we don’t think we can get it." That is the distinction that I am trying to draw. It is a quite simple but very important one.

Q125 Ian Swales: I know that we cannot talk about specifics, but what we heard yesterday was a description of a process where HMRC felt very comfortable, in the sense that it got 100% of what it felt it was owed on certain items, and 0% on what it thought it was owed on other items. It was quite clear from listening to the description. Even the Comptroller and Auditor General talked about the reality of sitting in a room, talking to such people, and the fact that with five or six items being spoken about, there is bound to be discussion along the lines of, "We’ll accept that one, but not that one." It is disingenuous to say in public that that kind of thing doesn’t happen. It was very clear from the evidence yesterday that it does happen.

Chair: Lin, I must say to you that it has been drawn to my attention that Dave Hartnett told us that he was present at that meeting.

Q126 Mr Bacon: And he had also mentioned that a lawyer wasn’t present. So there has been discussion by HMRC on a line by line basis of who was and was not present at meetings.

Lin Homer: I do not know which question you want me to answer now.

Q127 Ian Swales: Could you pick my question up first? Do you or do you not accept that if you are faced with a large corporate client where you have a number of issues-let us say, five or six-the propensity to settle for one is affected by whether or not another one is accepted?

Lin Homer: No. This is the point that was being discussed yesterday and that I have tried to make several times. Our "Litigation and Settlement Strategy" is in the public domain. We are clear that we settle for the amount of tax that we think is due. It is a separate issue if we sometimes get that wrong, and we are trying to be honest and accept that we did get that wrong. But we do not negotiate. We do not want to move to the position that the judge was suggesting for a very simple reason: it will encourage people to bring issues into the negotiation.

Q128 Mr Bacon: Do you mean package deals on and off the table?

Lin Homer: Package deals remain off the table.

Q129 Mr Bacon: Rightly or wrongly, our understanding is that, however much the "Litigation and Settlement Strategy" may say, "Package deals verboten," the reality is with these large corporates-Vodafone said in its own statement, "Do you realise how much we pay in payroll taxes, business rates, VAT and all these other things?"-when you sit down for a large negotiation, they put all these things on the table and what you actually do is reach a deal. This is the world; this is the reality. You are saying that that is not true.

Chair: Let me put this to you. There are negotiations, Lin. Are there negotiations?

Lin Homer: No, we are-

Q130 Chair: There are discussions.

Lin Homer: There are discussions.

Q131 Chair: If there are what you call discussions and what I call negotiations, it cannot be true that you always settle on the figure that is legally due. It must be true that, in some cases, you settle for less.

Lin Homer: We do not settle for less than we could reasonably expect to get.

Q132 Chair: No, that is legally due.

Lin Homer: That is not the phrase I used. I am trying to explain our strategy to you because one of the issues that was described yesterday is that the areas of law we are talking about are incredibly complex. I think that that is agreed by everyone. There is not a situation in these cases where there is a right answer and a wrong answer.

Q133 Chair: I understand that. Let me just pursue this and then you can come back. So, you do settle. You have a view on what is legally due, and then you settle for less than that because you make a judgment on what you are going to get in the courts.

Lin Homer: We settle for what we think we would get if we litigated.

Q134 Mr Bacon: No, with respect, that is not the evidence we heard yesterday. It was stated quite clearly by the judge. I think the word he used was inherent. He said "inherently" you will end up settling for less than you would get if you go to litigation because all of the other associated costs of litigation in terms of time, administrative cost, risk and all the rest of it. He said that "inherently" you will settle for a slightly different and lower number.

Lin Homer: That was the judge’s opinion, and what I am telling you is that, within our strategy, I think we seek to achieve a more purist position than that. There is an area involved in this, which you will understand from your experience as MPs, which is that, at times, you seek to establish the parameters of a legal position.

Chair: Without lawyers.

Lin Homer: What I think is evident in the cases is that we sometimes take that quite a long way, and we get settlements where-I think that the judge has commented on more than one of these cases-if we had litigated, we might not have got anything. It would be wrong to suggest that we are anything other than pretty fearless in those, but we are considering what the judge would determine in cases where there is not a single settled view. That is why we are trying to anticipate litigation. I am very clear that we do not want to move away from that position. We do not think that it would be right for us to make our mind up about what would be a fair deal. We are seeking to mirror what we would get in litigation quicker, with less cost and in a way that can be applied to other cases.

Q135 Ian Swales: Can I come back once on this? Obviously we are not going to say what was said in the private session yesterday, but it would be good for you, Lin, to reflect on certain aspects of the transcript in this regard. I will say no more than that. What you have just said comes back to something Mr Barclay was talking about earlier, which is if you don’t have that assessment that you are referring to now-about what you would get from litigation-you can’t know whether a settlement is reasonable or not. We haven’t had the comfort-maybe just because we haven’t had the information-from the report or the evidence, that in each of these cases, and indeed maybe other cases, the sufficient assessment of the likely outcome of litigation was there and recorded before the discussions took place.

Mr Barclay was trying to press: was this a number you had during, before or after? I don’t think we got clear answers. If you have got the process that you describe, then you would have the numbers, because you would have some kind of assessment of the likely outcome against which to judge the business case of "Should we do this or not? Should we delay and go for another round of legal work?" or whatever. I don’t see how you can actually make that judgment unless you have got the numbers up front.

Lin Homer: Chair, if the Committee would like, I am very happy to suggest a session with some of the senior people from business tax, where we talk in general, around a table, about the way we determine these cases. We have no desire to hide our process from you. On the position in relation to assessments, my expectation is that there will probably be judgments at various points through some of these cases, because one of the purposes of the Litigation and Settlement Strategy, which we believe has been really successful, is it draws more information from the company into the dispute; and in doing that, will sometimes enable us to say that an amount we may have thought was due is not, because there is a legitimate relief, or, in fact, to say that some amounts that we thought were out of scope should be brought in.

So it would be wrong to see this as view, then argument, then endgame. This is a discussion and a judgment, but what I am trying to give you is a clear reassurance that, as that information is available, our endgame is to get the tax we believe is due, not to get the best negotiation we can.

Q136 Chair: I just make the observation-and then I am going to bring Nick in-were it true that that was the basis, we would see much more litigation.

Lin Homer: There is a great deal of litigation, and we are very successful; we win two thirds of our cases.

Q137 Chair: How many of the big corporations that you are looking at are you currently in the courts on?

Jim Harra: Marks and Spencer-that’s in the public domain. We are litigating with Marks and Spencer on group relief. It is in the public domain that we litigated with Vodafone on some of the issues that we have picked up today.

Q138 Chair: Yes, but you then didn’t pursue that.

Jim Harra: It is a matter of public record. There is a whole range of litigation where we do.

Q139 Chair: Go on; how many? Marks and Spencer; Vodafone, which you then won, and then ignored the fact you had won.

Jim Harra: I’ll read you a list of cases that have been published in recent years where we have litigated, which are large corporates: Littlewoods, Legal and General, Philips Electronics, HBOS, JD Wetherspoon, Countrywide estate agents, Aberdeen Asset Management, Reed Employment, Marks and Spencer, as I have mentioned-

Q140 Chair: And how far back are you going, here?

Jim Harra: This is in the last few years.

Q141 Chair: What is few?

Jim Harra: There are currently just over 4,0001 live litigation cases in our solicitor’s office.

Q142 Mr Bacon: How many of those are large corporates?

Jim Harra: I don’t have figures for how many of those are large. I can describe for you significant cases that are either live, and are large, or are recently litigated; but it is our practice, under the Litigation and Settlement Strategy, to seek an agreement if we can; but we constrain ourselves through our strategy on the basis on which we will agree, and if we cannot reach agreement on that basis, then we will litigate. We give ourselves perhaps less freedom than the large corporate does, which might well bring in-

Q143 Chair: Mr Harra, just to get it clear: how many years?

Jim Harra: I don’t have details of how old all of those are. They are in recent years.

Q144 Mr Bacon: I am a bit surprised you don’t know. Large corporates are a small subset. They pay most of the tax. I think some very high percentage of the entire tax take is from the FTSE 100.

Lin Homer: Yes; 60%.

Jim Harra: If I can just reply: the HBOS case I mentioned-2009; the Scottish Widows case I mentioned-2011.

Q145 Mr Bacon: Mr Harra, I am really interested in how many live cases there are among large corporates. You are the director general of the large corporate division, so I would have thought you would be across that.

Jim Harra: I do not have the information with me on the numbers, and I would not like to give you the wrong number. It is over 4,000 without-

Q146 Mr Bacon: There aren’t 4,000 large corporates. I am not asking you to sign your name in blood, and if turns out to be wrong by 10, then please write us a note saying so; but what I am really asking is, for example, of the FTSE 100, is it two? Is it 98? What is it, roughly?

Jim Harra: I am not going to guess a number. I will write to you.

Q147 Mr Bacon: Is it because it is so low? You might be right that it is a good thing that it is low, because your policy is to negotiate where possible and they know that, and you are such hard ball players.

Fiona Mactaggart: The policy is not to negotiate.

Mr Bacon: I’m sorry: I used the wrong word. It is to reach a settlement where possible. I misspoke.

Lin Homer: We will give you a list. It is one of those things that, by this stage of the year-

Q148 Chair: It is such an obvious thing that we would ask. You are trying to say to us, "We don’t negotiate; we do what’s right."

Lin Homer: We do.

Q149 Chair: This is obvious, Lin. This is common-sense stuff. If it is what is right and you always go in for what is right, you would end up in the courts a lot, and I don’t see that in my general reading.

Lin Homer: The question here is what you notice and what you don’t. I want to make two points. One is that, for us, settling the large sum and litigating the large sum are both appropriate ways to go forwards, and part of the move towards the Litigation Settlement Strategy was a view that it was better to settle. I think in your report of a couple of years ago-I guess it was before your time as Chairman, Mrs Hodge-the encouragement for us was to settle cases more quickly. More than 85% of our cases are now settled within 18 months. But, at the moment, we have the Thin Cap group litigation order, which is in the Supreme Court. We do not believe it will be appealed. We have Shiner and Sheinman, which is in the Court of Appeal. Permission to appeal has been refused. We have the Eclipse case. We have the Tower MCashback case, which is in the Supreme Court, Gaines-Cooper in the Supreme Court, PA Holdings, Hankinson, Birmingham Hippodrome Theatre Trust, Glaxo, AXA, Carlsberg, Channel Islands, Pendragon, Findel-all of those range from first-year tribunal up to the Supreme Court, or House of Lords as it would have been. They range from a few tens of millions to billions, so it is absolutely wrong to suggest that we are not prepared to litigate. We don’t litigate if we can settle, because the amount we settle for is what we think we would get in litigation.

Q150 Nick Smith: I want to return to this correspondence with Mr Morris of Vodafone. I want a bit more transparency about this Vodafone letter. It is fair to say that, in Mr Morris’s letter, he is critical of the Reuters article. He says that Vodafone pays fair tax in the UK and has some quite hard figures about it paying £8 billion in taxes over the past 12 years, and then he talks about the £6 billion paid for the spectrum licences. However, there are no figures in this note that he has done for us for the interest payments on the money it borrowed to pay for the spectrum licences or, therefore, for the tax benefits on the interest that it could have claimed. Is that information publicly available? Do we know what’s going on?

Lin Homer: I am not sure that I understand. Published accounts?

Q151 Nick Smith: So the interest it is paying and, therefore, the tax benefits it got will be available in the Vodafone published accounts?

Dave Hartnett: There is not, Mr Smith, a necessary causal, clear link between the two, for the reasons I gave earlier about other reliefs that might be there, but the interest payment should be there year on year.

Q152 Nick Smith: It should be fairly clear what the tax benefits on those interest payments are, shouldn’t it?

Dave Hartnett: Not as clear as day follows night.

Q153 Chair: Try to make it simple for us and for the British public, rather than just hiding behind the complexity. It is so irritating. It is a simple question. Interest can be disregarded for tax, can’t it?

Lin Homer: Yes.

Q154 Chair: Right. So it should be clear, shouldn’t it? And if it’s not, why not, in theory?

Lin Homer: Tax is complex.

Q155 Chair: No-we are just talking about the interest payments.

Jim Harra: May I repeat what I said earlier? In the tax system, there is general tax relief for interest payments on borrowings. You would expect a large corporate, if it is borrowing for the purposes of its business, to get tax relief for the interest. In its accounts, I am sure you will be able to see the interest that it is paying. You will not see details of its UK tax computation.

Q156 Nick Smith: So back to the envelope numbers: it spent £6 billion on the spectrum licences and it would have paid interest on that. What are the tax benefits on the interest it is paying?

Chair: If it borrowed it all. It borrowed it from itself actually, didn’t it?

Dave Hartnett: The questions we would be looking at, Mr Smith, are: how much did it borrow? Did it borrow more or less than the cost of the spectrum?

Q157 Chair: Did it borrow it from itself?

Dave Hartnett: Exactly. Did it borrow it at arm’s length? Did it borrow in the UK or did it borrow somewhere else? Was there actual tax relief? What I mean by that is: was there a residual tax bill to pay in the year so that you can say it was £300 million of interest-that is a guess, by the way-at 26%, or was there actually no tax remaining payable? And-I am really sorry about the next bit-does it become a deferred tax issue, possibly the most complicated bit of a public company’s accounts, or what? I give you that simply to show that we cannot clearly throw out a precise figure from the accounts of the tax consequences.

Q158 Nick Smith: Chair, the reason I ask that question is that Vodafone is quite clear about the amount it paid in taxes, and it is a fair chunk of change, but it is not clear what tax benefits it has got from the interest payments it made on these licences. If you are going to have a balanced appreciation, it is fair to get all the information on the table.

Lin Homer: We are back into your position on tax transparency, Chair, and I have no doubt you are going to continue to hold those beliefs, but I am not sure there is much more we can say in that space.

Chair: Well, all we can say is that Vodafone, if it really wants to be believed, should give all sides of the picture, and not just one side.

Q159 Meg Hillier: Sorry, Chair. I apologise that I was out of the hearing earlier; I was tied up with business in the main Chamber.

This is a slightly side issue on this issue around litigation. There was a report in The Daily Telegraph on Saturday. The headline is "Billions tied up in tax tribunal". It says here that "Billions of pounds of potential revenue is tied up in 20,000 tribunal cases being fought by the taxman"-I guess, these days, that is you; it should probably update that to "taxwoman"-"it emerged last night". I am not sure what happened on Friday. "The backlog would reportedly take nearly four decades to clear, according to internal estimates" by HMRC. I wonder whether you recognise that figure, and if you have any comments about what level of litigation that is. It says tribunal-is that something that you recognise?

Lin Homer: We do not recognise that figure. Just very briefly, the tribunal was established only in 2009, so 2010 was its base year-well, was a transition year; there is not really a baseline yet. Twelve thousand cases were remitted to it last year. That compares with about 55,000 that we deal with by admin review, so many more are dealt with internally within HMRC.

I think our view is that the bulge in 2011, which did happen, is linked to a number of lead cases that relate, in the main, to some indirect tax cases. There are some gaming cases, some VAT cases and there are other cases relating to time limits and compound interest. In a number of those cases, hundreds and in some cases thousands of cases are stacked behind a lead case. I do not think we believe the tribunal has an ongoing problem. I think there is probably some sense in our working carefully with the tribunal to make sure that it is able to bring these very important lead cases as rapidly as it can.

Mrs Hillier will remember we had similar challenges with asylum cases in the asylum tribunal, and in my experience we were able to help the tribunal smooth its work and do the important cases early, so that the cases standing behind dropped quickly.

We do not recognise the figure of 38 years; we think it is early days. If it turns out the new tribunal is struggling, of course we will talk to the MOJ about resources, but we think it is very early days.

Q160 Meg Hillier: So you think you have got enough resources to deal with all the tribunal cases and everything escalating right up to the Supreme Court.

Lin Homer: We think we are still seeing the tribunal settle down. We would like to see lead cases decided early because, while we wait for those cases to go through the system, what inevitably happens is that lots of cases stack up behind them. It can be very easy, in the days of mass communication, for something that looks as if it might be successful, to draw people into a litigation, until such time as the tribunal takes a binding or key decision.

Q161 Mr Bacon: On the earlier question about how much litigation there is, you reeled off a whole load of examples. I found that a very helpful answer and more expansive than Mr Harra’s very carefully cautious earlier answer.

Lin Homer: I think he could not find the list.

Q162 Mr Bacon: Can I just be clear that you will send us a note about how many large corporate cases you have that are live at the moment?

Jim Harra: Yes.

Q163 Mr Bacon: Obviously, if they are live, they are in the public domain. You have a clear definition of "large corporate", do you not?

Jim Harra: Yes, we do.

Q164 Mr Bacon: What is it?

Jim Harra: It is an OECD definition-if turnover is more than £30 million or they have more than 250 employees, then we would define the organisation as large. We have the litigants themselves and also there will be lots of lead cases behind a main-

Q165 Mr Bacon: You mean leading cases that have been settled?

Lin Homer: Or that have not.

Jim Harra: If I can give you an example, I mentioned Marks and Spencer, which is the lead litigation case about the application of group relief. There are very many-

Q166 Mr Bacon: Everyone is looking at that case to see what happens with it.

Jim Harra: There are very many large businesses that stand behind it, waiting for the outcome.

Q167 Mr Bacon: By the way, how many large corporates are there?

Jim Harra: There are about 10,400.

Q168 Mr Bacon: So you will let us have a note saying how many are live cases?

Lin Homer: Yes.

Q169 Mr Bacon: Is it sometimes the case that part of your strategy might be that, during the-I nearly used the word "negotiation" then, but I just stopped myself-litigation process, you are busy litigating but you are also discussing ways you might stop at the door of the court at the next tier?

Lin Homer: Yes.

Q170 Mr Bacon: Simultaneously-so that is part of the strategy?

Lin Homer: You would expect us to, for the efficient use of my resources.

Q171 Mr Bacon: Absolutely. I am a great fan of the efficient use of resources.

Could you talk about the assurance commissioner? It may be for Mr Hartnett-I do not know. But when we met, I suggested to you, Mr Hartnett, that it might be a good idea to have a commissioner whose only job was looking at other commissioners’ work, and so you can imagine I was particularly pleased to hear this announcement and I think it is exactly what you should be doing. However, you have not appointed him or her yet, have you?

Lin Homer: I am not doing very much at the moment other than PAC hearings and recruitment. I have "live" the replacement for Dave, who leaves us at the end of July, and two DGs, because both Mike Eland and Stephen Banyard are leaving.

Q172 Mr Bacon: Where are they going?

Lin Homer: Retirement.

Q173 Mr Bacon: Right. And how long gardening leave will they take before somebody hires them, like Vodafone?

Lin Homer: I whispered to Dave earlier that there would no doubt subsequently be interest in any offices any of them held. And I think I will be able to bring you up to date with all of those recruitments within a week to 10 days.

Q174 Mr Bacon: Oh good. And Mr Hartnett, sadly you are leaving us at some point. Can you just remind us when you retire?

Dave Hartnett: 31 July.

Q175 Mr Bacon: Goodness-very soon. We are going to miss you. Can you tell us how long your bit of gardening leave will be before you are able, under the rules, to engage in any form of employment related to what you have been doing?

Dave Hartnett: I have got no firm plans, so I have got no firm answer. But it will depend on what I decide to do.

Q176 Mr Bacon: Great. So if you went off and worked on a North sea oil rig, there would be no delay at all?

Dave Hartnett: I do not think there would be any gardening leave in those circumstances, but I might be a bit old to do that.

Q177 Mr Bacon: I have worked on an oil rig and I have to say that I do not recommend it. But were you to go and work, and we assume that if you did go and do some other employment-you probably deserve a bit of time with your boots up, but if you were to go and work for a company advising them on tax issues, which one might assume with your skills you might consider doing, what would be the gap before you were able to go and do it?

Dave Hartnett: It depends what the role was. Let me give you two poles, as it were. If I were to do some of the things that I do for the UK now, like advising the Governments of developing countries on the development of their tax administration, I would expect the gap to be very short indeed. Were I to decide to throw my hat in with an organisation advising major corporates, the gap would definitely be a lot longer.

Q178 Mr Bacon: But how long? 12 months?

Lin Homer: It is a Cabinet Office procedure, and advice is taken.

Q179 Mr Bacon: So it is on a case-by-case basis?

Lin Homer: Yes, and as Dave illustrates, it links to what you have been doing and what you intend to do. We recently had a fairly senior member of staff leave, who has gone to work in a totally unrelated private sector environment, and he moved directly. But it is outside of Dave’s or my direct area.

Q180 Mr Bacon: It leads in nicely from what you were saying earlier, about advising developing countries on the structure of their tax administrations.

Like it or not, HMRC is not in a good place at the moment, reputationally. That may be unjustified, and in some cases it probably is. I heard what you said earlier, Ms Homer, about the quality of staff and it seems to me empirically that that must be true, otherwise people like John Connors would not be being hired. I take it as read, although I have not met many of them, that you have got a lot of highly talented and qualified staff.

There is a separate issue about how the organisation is led and managed, and particularly how it has been managed since the merger of Inland Revenue on the one hand and Customs and Excise on the other hand into one organisation. That itself has created a whole range of tensions, which I do not think have been fully worked out or worked through. At the same time, rightly or wrongly, a lot of staff lower down the organisation have felt excluded from decisions that they thought they should have been a part of or been informed about, and felt that they were not. One reason that we are having this hearing-and it is the fourth one that we have had on this very subject since September-is because lots of stuff came out from HMRC employees who, rightly or wrongly, felt that they were somehow out of the loop when they should not have been. I am merely stating facts, I hope, rather than things that are controversial. They may have been wrong about that, but that is the feeling.

At the same time, we have a national political environment in which, both for large corporations and for large rich individuals, it appears that, rightly or wrongly, there is one set of rules, whereas the small businesses in my constituency get hammered for six. A management accountant, who does a lot of books for small and medium-sized businesses, recently came to see me in my surgery because he had seen a palpable increase in the trend of HMRC appearing to hammer his clients more than it had done previously. At the same time, in the area of rich private individuals, the same type of circumstance seems to apply where, if you are rich enough and you can afford the right kind of advice, you get a different sort of deal, so that we end up with a situation where what appears to be lawful is considered "morally repugnant". That is a very unsatisfactory and unhealthy place to be, because we want the right amount of tax to be paid and we want it to be lawful. The Government’s policy, presumably, is that the law should be applied, yet the law has become so sclerotic and so complicated that it cannot be.

It is hard to believe that Ministers coming in-[Interruption.] I am going to finish my question very quickly. What I am trying to say is that the state of the UK tax system is very largely as a result of HMRC itself. The idea that it is merely one or two Ministers at the top who have steered it and led it to the point where it is so extraordinarily complicated is a bit hard to take. Obviously, Ministers have a big input, but we are where we are now.

Chair: I have to draw you to the question.

Mr Bacon: My question is what are you going to do about this? At the moment, you do not have public confidence and it appears to be a big mess.

Lin Homer: I shall try to answer that question slightly more succinctly than it was asked in order to allow the next one. We are not, I think, as lacking in credibility as you suggest. It is true to say that we have things that we want to do better. We have not talked today, for instance, about how well we answer the telephone, and the answer is not well enough. All of the evidence suggests that people do believe that our staff not only are highly competent and credible but give of their best.

Q181 Chair: Where is your evidence?

Lin Homer: Surveys. We regularly do surveys, and 70% of the people we ask believe that our staff are competent, credible and try to do a good job, and that is what I believe, too.

Q182 Chair: Do you think that that is good enough?

Lin Homer: No, I want it to be much higher. I think that I have got to continue work that Lesley, Dave and others have started of building up the confidence of the organisation itself, which was knocked by the merger. We have started-it is not anything to do with me but I intend to keep it going-a tax academy. We have 17,000 tax professionals. We have a reinvestment programme, and now is the right time not only to retrain some of our own people into the reinvestment area but to recruit anew. We may be able to take on as many as 1,000 new graduates, who will be tax qualified. That will either be at the technician level or at the four-year programme. That is a very strong signal of how much we intend to value tax. As I said earlier, I also intend to strengthen the tax competency, as well as the general competency, of the organisation.

My final point, which was your question, is we do not treat some taxpayers more helpfully than others. To the extent that that is a perception, we must change it. Let me give you one statistic. At the moment, we have 600,000 businesses1 on time to pay provisions. Those are small businesses. We have agreed nearly £1.4 billion of tax that we will delay; 90% of those businesses repay us when we give them time to pay, and 90% of the tax that is due in this country is paid. The credibility generally in the system is incredibly strong.

Q183 Chair: But 90%, Lin, leaves a lot of money.

Lin Homer: It leaves-

Q184 Chair: Last year, we looked at the whole of Government accounts and there was nearly £11 billion written off.

Lin Homer: It leaves a tax gap that you have said that we must pursue. In the last year, we brought in £20 billion in compliance-led work of which £11 billion came in through Jim’s area. We are very focused on that, but we should not forget that in this country the credible understanding is that for a civil society you pay your tax. We are delighted that that is what most people do; it brings in £470 billion. That’s the context.

Q185 Chair: We have to draw this to a close. I am going to bring Stephen in, but on the back of that I have just one question.

There was a "Panorama" programme a couple of weeks back, and last week we had Jimmy Carr and Gary Barlow. We weren’t in the country, but it was a public outcry and HMRC immediately promised action. I have looked at the transcript of the "Panorama" programme, and it seems to me that there were "morally repugnant" tax avoidance schemes by GlaxoSmithKline and Northern and Shell, which is Richard Desmond’s company, yet you have made no statement from HMRC. Are you going to investigate the allegations that were put in to that "Panorama" programme?

Lin Homer: We regularly investigate tax avoidance.

Q186 Chair: Are you going to investigate the allegations that were raised in the "Panorama" programme?

Lin Homer: I think that in a number of cases we were already.

Q187 Chair: Are you going to investigate them all? It talked about hundreds of companies.

Lin Homer: Where we have evidence that we can progress we will investigate. I was going to suggest that we draw to your attention a document that we also publish called "Spotlights", which seeks to give general information, widely available, about avoidance schemes and the types of schemes that we are investigating.

Q188 Chair: So, will you write to me about the generality?

Lin Homer: Very happily.

Q189 Chair: The "Panorama" programme was about the generality there really, and it used GlaxoSmithKline, which I notice you are litigating against. Are you litigating on the point that they are-

Lin Homer: I am not sure whether we are at the moment. The ones I listed are cases that we have won.

Q190 Chair: You said Glaxo in your list.

Lin Homer: I would have to find the list again.

Chair: Yes you did, honestly, because I picked it up.

Lin Homer: The ones I described are ones that we have won, although some have appeal rights. We are very happy to write to you generally on avoidance.

Q191 Chair: It might be helpful if that went into the public domain, because if you get a horror programme like that, with "morally repugnant"-to use the words that the Prime Minister and others have used-aggressive tax avoidance schemes being alleged, it is proper, if you want public confidence, that you respond to them.

Lin Homer: And when someone like The Times publishes a great deal of information, I think it is proper that-

Chair: And "Panorama".

Lin Homer: Exactly.

Q192 Chair: But you didn’t with "Panorama".

Lin Homer: You say that we didn’t. I do not think that it is for us to comment on everything that happens, but we do follow up, and I would want to assure you that-

Chair: Well, I would love to see what you are following up on those "Panorama" allegations.

Lin Homer: We will give you a note.

Q193 Ian Swales: Were you asked to participate in that programme?

Lin Homer: I think that we gave information, and I think that the Minister appeared. It may have been a very small piece in the way that it was-

Q194 Ian Swales: But not HMRC.

Dave Hartnett: We do not normally appear, Mr Swales, with the Minister.

Chair: It is a non-ministerial Department.

Q195 Stephen Barclay: Could I turn to paragraph 68 please, on page 42, on company E? Mr Hartnett, there were six issues of contention with company E. Could you tell us the date on which you first became aware of any of those six issues of contention?

Dave Hartnett: I can’t tell you the precise date.

Q196 Stephen Barclay: So, in preparing for today you did not prepare chronology.

Dave Hartnett: No.

Q197 Stephen Barclay: Can you give us a rough idea?

Dave Hartnett: I have said before that I became involved to try to help mend the relationship. I was briefed on the issues in the two weeks before the meeting of 19 November.

Q198 Stephen Barclay: So you were briefed two weeks before, but these are issues of more than £100 million in dispute, with case E. What I am trying to establish is when you first became aware of at least one of those six areas of dispute.

Dave Hartnett: I first became aware of the NICs issue in 2005, so when most of the financial service companies using the scheme settled. The rest I became aware of much later. What I was aware of more than two weeks before was the deteriorating relationship between the taxpayer and HMRC.

Q199 Stephen Barclay: So other than at the 2005 settlement, you weren’t then briefed on the £100 million dispute with Goldman Sachs between 2005 and two weeks before your meeting with them?

Dave Hartnett: Not that I can recall.

Q200 Stephen Barclay: And there was no management information on that.

Dave Hartnett: Not that I can recall.

Q201 Stephen Barclay: It is just surprising, as the senior tax commissioner-

Dave Hartnett: Not really, Mr Barclay, because I am doing lots of other things as well-

Q202 Stephen Barclay: Indeed you are.

Dave Hartnett: And my two colleagues involved with our matter at the meeting are experts.

Q203 Stephen Barclay: I did not dispute what was a factual statement; I take it on trust. I was just interested.

Coming back to the fact that you said that you were aware in 2005, were you aware that the settlement was reached with the 21 firms but not with case E?

Dave Hartnett: Yes.

Q204 Stephen Barclay: And did anyone tell you at any point that that case had been resolved?

Dave Hartnett: They neither told me that it had been resolved nor told me that it had not been resolved-I did not remain sighted on the matter.

Q205 Stephen Barclay: Right. It is just that when you gave evidence to Parliament you were very explicit in saying that when you had your lunch and then supper with Goldman Sachs you were not aware of any dispute.

Dave Hartnett: I think I need to clarify a point there, Mr Barclay. I went to Goldman Sachs’s premises twice, as I said before, once with a colleague from the Treasury to present to CFOs from across the FTSE 100-

Q206 Stephen Barclay: I was not commenting on the merits or otherwise of-

Dave Hartnett: It is the myth part-

Q207 Stephen Barclay: I was not commenting on the merits or otherwise-in fact, I defended your right to be accessible in contradiction to some critical comments. That was not my point. My point was the evidence you gave to Parliament, which was that when you had your lunch and your supper with Goldman Sachs you were not aware of any dispute, although you have also given evidence saying that you had overseen the 2005 settlement of the issues, which was a clear dispute with Goldman Sachs. I am trying to understand whether you had just forgotten in the interim or someone had briefed you to say that that issue had been resolved.

Dave Hartnett: I had not followed the issue at all. It was in the hands of the people who were at the meeting and our now retired head of anti-avoidance.

Q208 Stephen Barclay: So when you go to have hospitality with a firm, you do not check whether there are any disputes with the Department.

Dave Hartnett: Always, if I am having hospitality with the firm. I think it was Mr Bacon who mentioned 106 occasions-

Mr Bacon: I think it was 109-mostly it was you speaking and then listening, wasn’t it?

Dave Hartnett: Exactly. Because only four were with taxpayers.

Q209 Stephen Barclay: Okay. Coming to the briefing two weeks before, how many pages was the briefing you received before your meeting with Goldman Sachs?

Dave Hartnett: I don’t know, Mr Barclay.

Q210 Stephen Barclay: Have you got a copy of it?

Dave Hartnett: Not with me, and I have not seen a copy since then.

Q211 Stephen Barclay: If you are going to discuss six issues with a firm with which there is ongoing litigation and with which you reach a binding legal settlement exceeding £100 million of claim, would it not be normal to get a written brief?

Dave Hartnett: I had a written brief.

Q212 Stephen Barclay: So you had a written brief.

Dave Hartnett: I had a written brief, two weeks before.

Q213 Stephen Barclay: And what legal input was there to the brief?

Dave Hartnett: I am not aware whether there was legal input or whether there wasn’t, because the brief was managed by the sector lead and the case relationship manager. As I think I have given in evidence before, I was trying to improve a relationship.

Q214 Chair: I will tell you what we are going to do, because there is a vote. I had a couple of sweeping-up questions at the end and Steve has got some others, so we will put them in writing, because I think there will probably be two or three Divisions. And thank you, because we have kept you a long time.

Lin Homer: No, no, it is important.

Chair: Thank you for being patient with us.

Q215 Mr Bacon: Are we going to see Mr Hartnett again?

Chair: No, we may not.

Mr Bacon: May I just say that should you wish to come back at any time, you would be very welcome?

Dave Hartnett: Which side of the room?

Q216 Mr Bacon: If you wish to get elected to Parliament, you can come back to join us.

Lin Homer: Mr Bacon, I think earlier you said that you had enjoyed the exchanges but you didn’t ask Dave to comment the other way around. I think you have me back on 16 July on personal companies.

Chair: The Comptroller and Auditor General has agreed that he is also going to look at the way in which you deal with tax loopholes, arising out of the issue in The Times last week.

[1] UK Uncut has got permission to proceed with its application for judicial review. If UK Uncut does decide to proceed there will be a substantive hearing about whether its application for judicial review should be allowed. We do not know whether or not that will happen.


[1] A similar position was agreed for 2012

[1] We have checked this figure and in fact there are 8,154 live litigation items of litigation.

[1] Businesses and individuals

Prepared 13th July 2012