The Goldman Sachs settlement – 'not a glorious episode in the history of the Revenue'

I commented, in my blog on 15 May 2013 on the continuing controversy surrounding HMRC's deal with Goldman Sachs, in which a large amount of interest that was properly recoverable from the bank was written off by HMRC.

The High Court Ruling

I also discussed UK Uncut's judicial review application before the High Court Action in which it sought a declaration that the deal reached with Goldman Sachs was unlawful. Nicol J has now delivered his ruling in R (UK Uncut Legal Action Limited) v HMRC [2013] EWHC 1283 (Admin).

HMRC's mistakes

The judge stated that HMRC accepted that mistakes had been made in the settlement process.  In particular, Mr Hartnett had not consulted HMRC's lawyers regarding HMRC's right to recover interest on unpaid National Insurance Contributions ('NICs').  Nor had Mr Hartnett sought approval of the settlement with HMRC's High Risk Corporate Programme Board ('the Board').  When the Board did meet on 30 November 2010 it refused to sanction the agreement that had been reached. However, Mr Hartnett decided to ratify the deal on 9 December 2010 with another Commissioner, Melanie Dawes, Director General for Business Tax.  Details of the settlement were then disclosed by a whistle-blower working within HMRC which led to a hearing before the Public Accounts Committee on 14 December 2011, which we commented upon on 19 and 21 December 2011.

In their judicial review action, UK Uncut relied upon HMRC's Litigation and Settlement Strategy ('LSS'), arguing that because the LSS was published policy, HMRC was obliged to act in accordance with it in order to ensure fairness between all taxpayers.  In this respect, UK Uncut argued that the agreement reached with Goldman Sachs infringed the LSS because, contrary to paragraph 14 of the LSS, it was a 'package deal' which traded a promise to pay 100% of the NIC's in exchange for HMRC's promise to forgo interest on those contributions.  In addition, contrary to paragraph 15 of the LSS, HMRC's case was strong but it had in fact accepted a settlement for less than 100% of the tax and interest, meaning that Goldman Sachs obtained an advantage over other taxpayers who had settled similar disputes with HMRC in 2005.

Mr Hartnett's evidence

In his witness statement Mr Hartnett insisted that the overall settlement with Goldman Sachs was a very good one for taxpayers generally, even though Goldman Sachs had already lost their appeal before the First Tier Tribunal (see Goldman Sachs International v HMRC (No. 2) [2010] SFTD 930).  Mr Hartnett acknowledged, however, that Goldman Sachs had signed the new Code of Practice on Taxation for Banks and had threatened to withdraw from the Code if HMRC withdrew from the settlement. Mr Hartnett stated:

"…I was concerned that the withdrawal would have embarrassed the Chancellor, who had announced on 30 November 2010 that the top 15 banks including Goldmans had signed up for the Code".

Mr Hartnett was also concerned as to the impact more widely on HMRC's reputation if they  withdrew from the settlement.

The High Court judgement

Mr Justice Nicol did not accept UK Uncut's complaint that the settlement reached with Goldman Sachs had breached the LSS. This was because the settlement agreement did look at each issue separately and could not have been  said to have been a 'package deal' given that the NIC's and interest on the NIC's had been discussed and treated as separate issues.  The bigger problem with the agreement was that HMRC had not consulted with lawyers litigating the NIC's issue against Goldman Sachs and had, therefore, misunderstood the legal position regarding interest i.e. that there was no legal barrier to its recovery.  Those negotiating on behalf of HMRC had also overlooked the need to obtain approval from the Board.  Because of these mistakes, Nicols J held that the binding decision of the Commissioners was not in November 2010 but rather on 9 December 2010 when Mr Hartnett decided to ratify the deal with Ms Dawes.  At that second meeting, because of the unusual circumstances of the agreement and HMRC's failings, the judge considered that the Commissioners were dealing with an exceptional situation for which the LSS was not designed. Nicol J said at para 38:

"As I had said, the strategy was beside the point.  It simply did not have in contemplation a  situation where an agreement has apparently been made, but where HMRC had made  some important mistakes…".

Counsel for UK Uncut had strongly argued that the real reason for the decision of 9 December 2010 was to save the embarrassment of those involved.  However, Nicol J said at para 46:

"In my judgment, though, the Claimant could only succeed on this ground of challenge if it had given Mr Hartnett the opportunity to respond in cross-examination… fairness required Mr Hartnett to have the opportunity to answer that allegation orally".

As a result, Nicol J held that UK Uncut's claim must fail. UK Uncut could not prove that saving HMRC or the Chancellor from embarrassment was the key factor which had influenced Mr Hartnett or Ms Dawes and in any event the decision would have been the same even if Mr Hartnett had not taken any account of the potential embarrassment to those concerned including the Chancellor.  This was because, in the absence of cross-examination, Nicols J accepted that Mr Hartnett had believed that the decision made on 9 December 2010 was the correct one to take.

However, the judge concluded at para 66:

"The settlement with Goldman Sachs was not a glorious episode in the history of the Revenue. The HMRC officials who negotiated it had been briefed by the lawyers who were litigating against Goldman Sachs. They relied on their belief that there was a barrier to the recovery of interest on the unpaid NIC's … HMRC accept now that there was no such barrier. The officials who negotiated the agreement overlooked the need for approval from the (Board)… furthermore HMRC did not appear to have taken a contemporaneous note as to the agreement which was reached on 19 November. That allowed a degree of uncertainty to prevail for a time as to what precisely had been agreed … next, by his own admission, when he decided to approve the settlement on 9 December 2010, Mr Hartnett took in to account potential embarrassment to the Chancellor of the Exchequer if Goldman Sachs were to withdraw from the Tax Code. HMRC accepts that this was an irrelevant consideration and should not have featured in his decision making process".

Comment

The Goldman Sachs affair has caused a great deal of embarrassment for HMRC as a department and Mr Hartnett personally.  One could be forgiven for concluding that hitherto there has been a lack of effective internal governance within HMRC when it comes to settling disputes with certain large corporates. It is to be hoped that the new governance procedures introduced by HMRC following the Goldman Sachs debacle will prevent similar mistakes from occurring in the future and that the LSS will be applied in a consistent manner to all taxpayers.