The National Audit Office (‘NAO’) has recently recommended (see HM Revenue & Customs 2010-11 Accounts) that HMRC should ensure that a clear separation should exist between the negotiation and approval of large tax settlements in order to maintain public confidence in the appropriateness of all such settlements.

The big corporates

The corporation tax take of UK plc is critically dependent on the performance of the UK’s largest corporates, some of whom have, according to HMRC, engaged in aggressive tax avoidance behaviour over the last decade.  As part of its compliance programme, HMRC established the High Risk Corporates Programme in 2006 to target certain companies deemed to be a high risk in this respect.  As part of this programme, a number of tax settlements were reached with HMRC which led to some public disquiet as to whether HMRC had, in fact, reached a settlement on favourable terms to the UK Exchequer.

The NAO findings – the good news

The NAO report confirms that HMRC generally has good governance over the High Risk Corporates programme and praised the programme as having: “contributed to the reduction of high value open issues and brought in a yield of £9.2 billion to March 2011″.  Twenty seven disputes were examined and the NAO sought the views of major accountancy firms and six of the UK’s largest businesses on HMRC’s performance in resolving disputes.

Now for the bad news

Five Commissioners of HMRC have the ultimate responsibility for collecting and managing tax revenues.  The NAO found that in three of the largest settlements examined, “one or both of the Commissioners signing off the settlement had also participated in the negotiations.”  The NAO further found that in these three cases “there was no, or limited, separation between the negotiation and the approval of major tax settlements (though in one case there was support from independent legal counsel for the settlement)”.  The NAO further said “in a case where both Commissioners were involved in the negotiations, there was no independent scrutiny of the proposed settlement”.

Do large settlements favour the large corporates?

HMRC’s relationship with the large corporates illustrates a fundamental economic fact of life.  This is that there are limits to how far HMRC can take its compliance activities against the largest tax payers in circumstances where UK plc is critically dependent on the monies that are gathered by way of corporation tax.  This gives the large corporates an enormous leverage in any negotiations. The drivers for HMRC to enter into settlements in order to meet its targets and maximise tax take are very strong.   

It is crucial, therefore, that any negotiated settlement reached with a large corporate is open and transparent and is seen to be independent and in accordance with the law.  The yardsticks of transparency and impartiality will be of particular significance when the new mediation programme comes into play.  HMRC will need to ensure that it acts in a manner which removes any suspicion that mediated settlements are being used as a way of  avoiding the criticism that has been levied in  relation to the High Risk Corporate programme.  Developments in this area are eagerly awaited.

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And finally….

It would appear that even God is not safe from HMRC. Well, Kellswater Reformed Presbyterian Church at any rate. The Church (congregation of 50) was unable to submit an online PAYE return as it did not own a computer, so it offered to file a paper return instead.  HMRC was not impressed and imposed a penalty of £400 on the Church. The tax tribunal upheld the penalty saying amongst other things that the Church had not explored options of seeking technical expertise outside of the congregation (perhaps they should have used the internet café in nearby Ballymena?). HMRC’s desire to go ‘paperless’ is laudable enough (although at times they take it too literally: http://www.bbc.co.uk/news/business-14291641 ), but the words ‘sledgehammer’ and ‘nut’ spring to mind. These sentiments were echoed by the Tribunal who urged HMRC to “take the initiative and help the Appellant to find a solution to its difficulties”…