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UK 'Sweetheart' Tax Deals 'Reasonable', Says Watchdog

by Robert Lee, Tax-News.com, London

15 June 2012


The UK National Audit Office (NAO) has concluded that the settlements reached by HM Revenue and Customs (HMRC) in five large tax cases were "reasonable" but has expressed concern about the opacity of the processes used by the tax department in reaching these settlements.

The NAO review of the settlements followed serious concern by the parliamentary Public Accounts Committee about how HMRC had handled these settlements or overlooked governance arrangements. The NAO also examined the basis of concerns expressed by whistleblowers.

The NAO report, published on June 13, was based on an examination of five cases by former High Court tax judge Sir Andrew Park following concerns in parliament that HMRC had given favourable treatment to certain large corporations during tax audits, in what has become popularly known as a series of 'sweetheart deals'.

According to the NAO report, all five settlements were "reasonable" for HMRC to have reached under the circumstances and at least one may have been "better than reasonable".

"These large settlements are complex and there is no clear answer to what represents the ‘right’ tax liability," the NAO said in a statement. "In each case, there was a range of justifiable positions the Department might have taken. The NAO’s examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option."

However, the findings of the report confirm the NAO’s concerns regarding the governance arrangements operating in these cases. The NAO found that specialist staff were sometimes excluded from the final settlement negotiations and that HMRC did not always ensure that these staff involved understood the reasons for settlement. Poor internal communication as to the reasons why these settlements had be reached also resulted in a loss of confidence in the settlements, both within HMRC and in wider circles, according to the NAO.

The report also found that in certain settlements, it was not clear whether HMRC's Litigation and Settlement Strategy had been followed. "For instance, there are some disputes where the only possible outcomes are either that the taxpayer owes nothing or that it owes the full amount," the NAO said. "In these circumstances, the Department’s Litigation and Settlement Strategy does not permit ‘splitting the difference’. In one settlement, the Department settled for less than if it had won in litigation. This was reasonable, given the costs and uncertainties of litigation, but was not clearly compatible with the Strategy."

While in most cases, there was no need to seek legal advice before agreeing settlement terms, the NAO found that in one case, the Department did not consult its lawyers when it should have done because there was ongoing litigation.

Amyas Morse, head of the National Audit Office, commented: “On the basis of Sir Andrew Park’s reports, I conclude that the settlements reached by HMRC in these five cases were all reasonable. Moreover, in settling them, the Department successfully resolved multiple, long-outstanding tax issues. However, our concerns over the processes by which the settlements were reached have been confirmed. It was not appropriate to set up governance arrangements specific to certain cases or to fail to apply processes correctly. Poor communication with staff also undermined confidence in the settlements.”

In response, HMRC stated that new governance arrangements for significant tax disputes, to provide greater transparency, scrutiny and accountability were announced in February. It is also appointing a new Tax Assurance Commissioner, to ensure a clear separation between those who negotiate and approve settlements.

“We welcome today's report, which confirms that the settlements reached were reasonable and that the overall outcome for the Exchequer was good," said an HMRC statement. “We have always maintained that the settlements represented good value for the UK, by making sure that large businesses play by the rules in often complex international transactions."

TAGS: tax | business | law | corporation tax | audit | United Kingdom | HM Revenue and Customs (HMRC) | HM Revenue and Customs (HMRC)

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