From Treasury Committee hearing with Dave Hartnett, Permanent Secretary at HMRC
12 September 2011
Q645 Jesse Norman: Mr Hartnett, the NAO talks about governance errors. What is a governance error? What does it mean in this case?
Dave Hartnett: A governance error is where there is a process to oversee—I think in the context of the NAO, you are thinking of settlement of an investigation—and that governance does not happen in line with our processes.
Jesse Norman: We are now back in Sir Humphrey world.
Dave Hartnett: I am not.
Q646 Jesse Norman: Perhaps you could be a little bit more explicit as to why the governance has not, in some case referred to by the NAO, gone in accordance with your processes. What does it mean to say that it has not gone in accordance with your processes, and why has that happened?
Dave Hartnett: I think there are two cases that the NAO identified. There was one where a settlement was approved without the whole of the High Risk Corporate Programme Board being consulted before the taxpayer was told that the case was settled. In another, we reached a conclusion on an issue, not realising that an impediment to full application of the relevant law no longer applied and that the official responsible for taking that to the High Risk Corporate Programme Board did not initially realise that was necessary. The governance worked very well, because the High Risk Corporate Programme Board identified that issue.
Jesse Norman: I have certainly misunderstood what you have just said. In the second case, what happened?
Dave Hartnett: In the second case, there was a misunderstanding of a particular aspect of the law.
Jesse Norman: Of the law?
Dave Hartnett: Of the law. There had been an impediment, which had prevented the law being applied in a particular way, and the individuals involved in the case did not realise that that impediment had been removed.
Q647 Jesse Norman: So they could have got more if they had not thought the impediment was there. Then it was discovered the impediment was there, and they then went and got the extra.
Dave Hartnett: In this particular case, the matter was referred to the High Risk Corporate Programme Board later than it should have been—only by days—because the individual responsible for the case did not realise it had to go there.
Q648 Jesse Norman: In the first case, where the board was not consulted—
Dave Hartnett: Not fully consulted.
Jesse Norman: Not fully consulted. What is the problem with that? Why is that an error of governance?
Dave Hartnett: Because we have a process laid down, and it was not fully followed.
Q649 Jesse Norman: I suppose I am asking why the process is the way it is. What problem is the process designed to guard against?
Dave Hartnett: The process is designed to ensure that for cases under a particular amount of money, there is a broad oversight among our tax leaders of a proposed settlement.
Q650 Jesse Norman: In other words, you do not want individual people going off and striking a settlement unless it has been properly shared. You do not want people running off and doing private deals.
Dave Hartnett: Absolutely.
Q651 Jesse Norman: Were you personally involved in doing this particular deal?
Dave Hartnett: The one that was not approved by the whole—
Jesse Norman: Yes.
Dave Hartnett: No.
Q652 Jesse Norman: ... Are we talking about the Goldman Sachs deal, just so I understand?
Dave Hartnett: Mr Norman, you know I cannot answer that.
Q653 Jesse Norman: Okay. There has been a deal done with Goldman, I think I am right in saying, in which they were—
Dave Hartnett: I am really sorry, but I cannot talk at all about a specific taxpayer. To make sure I could not do that, twice in the last 10 days, I have been to see our most senior lawyers to see whether there was anything I could say about the newspaper reports on this, and they have said no.
Q654 Jesse Norman: Take the case we are talking about. The error has now been put right, is that correct?
Dave Hartnett: Mr Norman, there is huge speculation that the case referred to in the NAO report is Goldman Sachs, and my legal advice says I cannot say anything that adds to or detracts from that speculation.
Q655 Jesse Norman: My last statement ... is just a question, which is: if there was a governance error, has the error been corrected, regardless of who the institution or not may be?
Dave Hartnett: I am very sorry, but because of the huge media speculation that that second case is Goldman Sachs, I am unable to answer any questions. I do not want to be difficult with the Committee. I knew this would arise, and colleagues and I got legal advice to see what we should do.
Q656 Jesse Norman: While we are on the issue, which you do not want to talk about and I do, have you ever had corporate hospitality from Goldman Sachs?
Dave Hartnett: I have been to a supper with Goldman Sachs. I would not call it corporate hospitality from them. I went with a managing director from the Treasury to talk to about 20 chief finance officers from FTSE 100 companies about developments in tax policy and tax administration.
Q657 Jesse Norman: Was any dispute with Goldman outstanding while you had this experience?
Dave Hartnett: I knew nothing of Goldman’s tax affairs when I was at that supper. I do not deal with Goldman’s tax affairs.
Q658 Jesse Norman: ... By extension, I assume you cannot talk about Vodafone, although we had a conversation about Vodafone when you were last in front of the Committee?
Dave Hartnett: The advice I had then was that because there were a lot of non-issues in the media, I could correct those, and that is what I sought to do.
Q659 Jesse Norman: ... One of the questions that has been put about the Vodafone settlement is that the Treasury never collected the interest owing on the tax that was payable. I forget if you addressed that issue last time; did it in fact collect the interest that was payable on the tax that was owing?
Dave Hartnett: I am in the same place again, Mr Norman. Can I just say, I would really like to answer these questions for the good of our Department and to make clear my own position, but your interim report in July made clear that the law really does not allow us to defend ourselves when it comes to having to talk about individual taxpayers?
Jesse Norman: I am not seeking to attack you or anyone else. I just need to get the facts straight.
Dave Hartnett: I understand that.
Q660 Jesse Norman: For the record, you cannot clarify whether or not interest was charged on the tax that was payable. Let me ask another question: does the law require that interest be paid on tax that is owing?
Dave Hartnett: Depending on the circumstances, yes.
Q661 Jesse Norman: What kinds of circumstances would release HMRC from this obligation?
Dave Hartnett: Let me try to give you an example, which I hope is helpful. One of the areas where we have not sought tax—I am just trying to find a note I wrote to myself on this—is in relation to certain controlled foreign companies, where following a change in the law on the taxation of overseas dividends in 2009, so that the majority of dividends paid by overseas companies were no longer taxable, we looked again at how certain exemptions applied. We discussed this with our own lawyers, other lawyers, and business extensively, and developed something called the new approach to CFCs. We consulted widely. This applied to the motive test in relation to the CFCs, so that where a company pays a dividend now—post-2009—and elects to be taxed on it, and is therefore regarded as passing the motive test, no interest arises on that. I am sorry that is rather complicated. We can set it out in a letter, if that helps.
Jesse Norman: ... I am grateful for that offer and I accept it. Just to be clear, circumstances under which interest might not legally be required to be paid on tax owing are of the kind you describe.
Dave Hartnett: There are others.
Q662 Jesse Norman: In the case of Vodafone, this interest had been long-standing for a very long period of time, much later than 2009. It is absolutely opaque as to why the treatment of dividends would have any bearing. I suppose that may have been the cause of the tax that was owing?
Dave Hartnett: I am feeling, Mr Norman, as though I am thwarting all your questions, but I cannot answer questions on Vodafone. I am very sorry.
Q663 Jesse Norman: When you last came before us, you said that, in terms of avoidance, some £6.2 billion had been protected through litigation, and I subsequently had a letter from Dame Lesley suggesting a list showing £6.5 billion. Something like just under £6 billion of that was from fighting group litigation challenges. Only about £100 million was on corporation tax avoidance cases. That is £100 million out of the £6.2 billion. In the list of legal decisions that I was sent, just seven cases had been taken to the tribunal since 2000. My question is: can that really be a decent response to issue of corporate tax avoidance, amounting to evasion?
Dave Hartnett: I think, Mr Norman, the first thing I would like to do is look at the analysis of those numbers, because one case—we mentioned it at the last hearing, so it is in the public domain—Prudential, which is about off-market swaps, has produced about £1 billion through the immediate case and the 30 or so following cases. The analysis you have given, which I have not made for myself, so I cannot really comment on now, is not right, in terms of the money that has flowed from some of those cases.
Melanie Dawes: Can I add, Mr Norman, that on corporation tax, we also have a lot of other cases with large businesses that are following on from some of those cases? On VAT, it is more usual to find that each case has to be heard on its own merit, so you will find that there are often a lot of other companies standing behind what may appear to be quite a small number of cases but actually involves quite a large amount of tax.
Q664 Jesse Norman: ... You will know from previous discussions that I feel very strongly about the high penalties being imposed on small business, and the small penalties being imposed on large business. My colleague, Mr Blenkinsop, raised the question earlier about percentages being charged in penalties and, of course, when you have a negotiated settlement, almost by definition there is no standard compared to which you can charge penalties, which builds in a bias in favour of large companies, who can negotiate their terms of settlement, and against small companies.
However, the Revenue is occasionally successful in these cases, and here is an example: Prudential had a scheme involving deliberate mislabelling of payments in order to arrange a tax break. In that case, there was no penalty charged at all, as far as I am aware, but there are countless cases—every constituency has them—involving small businesses in which HMRC is relentless in chasing large penalties on small business. I am just wondering why you are not charging penalties in cases like Prudential’s. In 2008, you told the House that penalties from large businesses would increase, but in fact they have gone down, haven’t they?
Dave Hartnett: Yes, they have.
Q665 Jesse Norman: Why should that be? That seems to me a pretty poor outcome.
Dave Hartnett: We did touch on this at the last hearing.
Jesse Norman: Let us talk about Prudential then. We do not need to expand on the point; I have made the point about the drop in paying penalties.
Dave Hartnett: Our people will have looked incredibly carefully at every case that we have litigated and won that involves avoidance, or that we have settled, to determine whether the law allows a penalty to be taken. Forgive me, but I do not have the transcript of last time with me; however, one of the points that I know Mr Clasper wanted to make—I cannot remember whether he made it—is that evasion in large business, or dishonesty in relation to taxation, is something that we do not see very often; I certainly made the point first. In order to take a penalty from large business, we have to find that the law can be applied. With smaller business, there is more often dishonesty, or—
Jesse Norman: There is more often provable dishonesty. If someone goes into a negotiation with you with a bunch of numbers that they just want to get away with, and you make your way to a negotiation, it is hard to prove dishonesty, although they may have started miles away from where you were, in terms of negotiation.
Dave Hartnett: We do search out for dishonesty and our investigators are very good at it. Over the years, we have often asked our criminal investigators and other specialist investigators to take up an inquiry into big business avoidance and search out the dishonesty.
Q666 Jesse Norman: The Prudential case is a counter-example to that. I have here a copy of the legal report: “HMRC win on ‘mis-labelling’ (Tax newsflash, June 2009)”. It says that the Court of Appeal affirmed the judgment on the Prudential issue in favour of HMRC. You win the case; where is the money? They should pay the penalty. The Court of Appeal has found for you in this. It seems cut and dried that penalties should be paid. These people have attempted to get away with not paying, and they have been found out.
Dave Hartnett: I am afraid, Mr Norman, that all our legal advice is that winning in the Court of Appeal is not enough for us to be able to take a penalty.