HMRC tax settlements were "reasonable", NAO says, as campaigners granted court challenge

However the National Audit Office (NAO) said in a report (50-page / 397KB PDF) that it had "concerns" about the way the department went about those settlements.

"Our concerns over the processes by which the settlements were reached have been confirmed," chief auditor Amyas Morse said. "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."

The NAO based its conclusions on the recommendations of former High Court tax judge Sir Andrew Park, who examined five unnamed large settlements. The report was published the day after the High Court gave campaigners UK Uncut permission to apply for a declaration that HMRC had breached its public law duties on a high profile settlement arrangement, with investment bank Goldman Sachs, by failing to comply with its own litigation and settlement strategy (LSS) when reaching a settlement agreement. The agreement resulted in an alleged loss to the Treasury of up to £20 million in tax, it said.

Tax litigation expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the court's decision was a "game changer" which had "blown taxpayer confidentiality apart".

"Organisations have long recognised that internal documents or emails might end up in the public domain, but now it seems that what might be assumed were confidential discussions with the tax authorities could end up there too," he said. "Although this is a judicial review of HMRC the Court may order disclosure to see what was actually discussed between Goldman Sachs and HMRC, putting Goldman Sachs in a difficult situation. HMRC come out of this really badly - this case will impede the ability of businesses to discuss tax issues frankly with it."

Last year, a report published by the House of Commons' Public Accounts Committee (PAC) identified "specific and systemic" failures in the way in which HMRC handled tax disputes with large companies. Permanent Secretary for Tax Dave Hartnett appeared before the Committee in October to answer allegations that he had misled MPs about his involvement in the settlement with Goldman Sachs, which followed a technical mistake by the department.

The LSS sets out the principles within which HMRC handles all tax disputes subject to civil law procedures. In a public commentary document (47-page / 214KB PDF), published on its website, HMRC commits to resolve tax disputes consistently with its view of the law while considering the most cost effective solution to disputes. The LSS states that HMRC must settle for the full amount it believes a tax tribunal or court would determine in "strong" cases, and only "concede rather than pursue" in "weak or non-worthwhile" cases. It does not permit "splitting the difference" if the only possible outcome to a dispute is either that a taxpayer owes nothing or it owes the full amount.

"In one settlement, the Department settled for less than if it had won in litigation," the NAO said. "This was reasonable, given the costs and uncertainties of litigation, but was not clearly compatible with the Strategy."

In its report, the NAO said that there was a range of "justifiable positions" HMRC could have taken on each of the five settlements. In each case the settlement reached was reasonable, and in one case "may have been better than reasonable", bearing in mind the outcome that might have been expected if the cases had been pursued in the courts.

However, the way in which the settlements were handled resulted in a "loss of confidence" that they were in fact reasonable both within HMRC and externally. The NAO noted that specialist staff were in some cases excluded from final negotiations and that HMRC did not always ensure that they understood the reasons for settlement.

"The NAO's report just goes to show that HMRC's litigation and settlement strategy isn't working," tax law expert Jason Collins said. "Without changes, and without being allowed to move back towards a more commercial split-the-difference approach in the right circumstances, HMRC is letting potentially hundreds of millions of pounds slip through its fingers. Allowing HMRC to negotiate a compromise settlement in a case where HMRC is uncertain of whether or not it could win could bring in a much-needed boost to the Treasury's income."

There was often no "right" answer in complex tax cases, Collins said, particularly where a taxpayer was involved in a number of disputes.

"The NAO also pointed out that, where a taxpayer has a number of disputes, it is unrealistic to say that a settlement should not be reached which recognises the interdependence of the issues," he added.

HMRC announced in February that it planned to appoint a senior 'assurance commissioner' to oversee any tax settlements for more than £100 million reached with large companies. The commissioner, who will not have a role in any taxpayer's individual affairs, will challenge whether any proposed settlement secured the correct amount of tax efficiently and ensure taxpayers are treated even-handedly.