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Tax Authorities’ ‘Sweetheart’ Deal With Bank was Flawed but Not Unlawful

A tax settlement agreed between Her Majesty’s Revenue and Customs (HMRC) and investment bank, Goldman Sachs, was infected by a fundamental factual error and consideration of irrelevant matters – in particular the ‘potential embarrassment’ of the Chancellor of the Exchequer – but was nevertheless lawful, the High Court has ruled.

Attacking the agreement as a ‘sweetheart’ deal, campaign group, UK Uncut Legal Action Limited, had sought a judicial declaration that the settlement of a long-running dispute between HMRC and the bank in respect of national insurance contributions (NICs) was so seriously flawed as to be unlawful.  It was submitted that, as a result of the compromise reached, the bank had escaped having to pay up to £20 million in interest on outstanding NICs.

The court acknowledged that the settlement ‘was not the most glorious episode in the history of the Revenue’ and that HMRC officials had engaged in negotiations on the mistaken assumption that, if the bank agreed to pay the outstanding NICs in full, they were precluded from also seeking payment of interest on those sums.

The officials had overlooked the need to seek higher approval for settlements worth over £100 million and it was accepted that David Hartnett, who was then Permanent Secretary for Tax at HMRC, had taken into account an irrelevant consideration – the potential embarrassment to the Chancellor of the Exchequer if a compromise was not achieved.

However, the court ruled that it was not irrational for the officials to have taken account of the desirability of good relations between HMRC and Goldman Sachs and the potential damage to HMRC’s reputation if the bank withdrew from negotiations. The settlement had subsequently been approved as reasonable by the National Audit Office and HMRC was adamant that it represented a ‘good deal’ for taxpayers. In the light of HMRC’s concessions, the court ruled that it was not appropriate to grant the declaratory relief sought by UK Uncut.

After the hearing, the campaign group’s representatives described the outcome of the case as ‘disappointing’ but added: “Without this legal action, HMRC would have succeeded in keeping secret the fact that the settlement was in part motivated by saving the blushes of the Chancellor rather than collecting the tax due to the public purse. We hope through this litigation that HMRC has learnt from its mistakes in the past and will ensure that such sweetheart deals do not happen in the future.”

HMRC stated in a press release: “Large business tax settlements are a vital part of how HMRC secures tax revenues for the country and without them Britain’s public finances would be seriously damaged.” Jim Harra, HMRC’s director-general for business tax, said: “The High Court’s comprehensive dismissal of UK Uncut’s claim puts to rest the fallacy that HMRC is soft on large businesses.

“HMRC has an exemplary record in relentlessly challenging those who avoid tax. We have recovered £34 billion in additional revenues from large businesses in the last seven years. The High Court’s judgment confirms what HMRC has always said: that while we made errors in settling the Goldman Sachs dispute, we made the right settlement in the circumstances and that our decision was both proper and lawful.

“This issue has been rigorously and repeatedly scrutinised – by the Public Accounts Committee, by a retired High Court judge on behalf of the National Audit Office and now by the High Court itself.”