Questions that Hartnett must answer

LIKE HIS namesake TV channel, Dave Hartnett must feel like he’s on repeat. In 2010, the permanent secretary for tax was forced to apologise following errors with PAYE coding that resulted in 15 million people being affected and was called to answer allegations around a sweetheart deal with Vodafone; this year, the criticisms revolve around the supposed seven million people affected by PAYE coding errors, and a sweetheart deal with Goldman Sachs.

A worrying element for Hartnett is the sheer breadth of his critics. On the right, we have the Taxpayers’ Alliance, which has called for his resignation in the past, and the Daily Mail and Tory MP Jesse Norman, who have called for his resignation this time round. On the left, we have UK Uncut, protesting yesterday at Hartnett’s supposed favouring of big business.

It has not been a fun fortnight for Hartnett, more Outnumbered and Men Behaving Badly than Shooting Stars. Before the PAYE errors came to light, Accountancy Age suggested Hartnett was unlikely to leave as he was too big to fail. But what questions must he answer following the various controversies?

Real-time reporting – too much too soon?

As we reported last week, the furore over the PAYE “fiasco” was a misinterpretation of the facts. Of the seven million people affected, up to six million will be enjoying bonuses following the identification of overpayments from six years ago made possible by HM Revenue & Customs’ new computer systems.

The remaining 1.2 million will have to pay money back because of incorrectly coded PAYE returns. There has been sympathy from the tax advisor community to this – with such a complex system, there will always be incorrect codes and keeping the number below last year’s genuine fiasco was essential.

The complexity of the PAYE system is one of the drivers for the introduction of real time information (RTI). This will mean that PAYE will be reported at time of payroll rather than at the end of each financial year, thereby reducing the number of errors.

In the long run, it is likely to simplify the system and has been welcomed across the board in principle. However, in the short term it might not be so beneficial. Advisors and in-house finance teams have not been convinced that the deadline of autumn 2013 is achievable for full implementation. Nor, according to murmurings, is the Department of Work & Pensions, which is relying on RTI to implement the Universal Credit, with work and pensions secretary Iain Duncan Smith promising to keep a closer eye on the project.

If this goes wrong, the 2010 PAYE fiasco will pale into comparison. The previous underpayments normally affect people with complex employment arrangements – those who move employers a lot, for example. But if RTI goes wrong, it could affect many more people.

Alastair Kendrick, director of employment tax at MacIntyre Hudson, says that there is a resource issue for HMRC. “If HMRC deal with monthly returns as they say they are going to deal with them, then the PAYE errors won’t arise. But have they got the resource to deal with them in real time?”

HMRC has been given a hard task in achieving the implementation by the deadline. But it simply must do so. Hartnett has to convince taxpayers it will be done.

Goldman Sachs – beyond confidentiality

Whereas the PAYE criticisms were over the top, the anger following the so-called sweetheart deal with Goldman Sachs investment bankers is more understandable. According to the National Audit Office, an impartial body that scrutinises HMRC accounts, the Exchequer missed out on between £5m to £8m in interest payments in the deal with Goldman Sachs due to an error.

In 2005, HMRC successfully challenged the use of employee benefit trusts, which provide interest-free loans to employees while avoiding National Insurance. Of the 22 companies cited, 21 paid up – Goldman Sachs was the only business to challenge the bill. HMRC warned Goldman Sachs that it would charge interest if GS continued its opposition.

However, the controversy began with the leaking of a minute from a meeting of HMRC staff including its in-house counsel, Anthony Inglese. Inglese indicated that Hartnett shook hands on a deal with Goldman Sachs in November 2010, which failed to charge the bank interest. This followed a meeting between Hartnett and two other HMRC officials and representatives from Goldman Sachs.

Hartnett claims that HMRC believed there was an “impediment” to collecting the full amount due. He became aware the impediment had been removed too late due to HMRC error.

The real issue to Hartnett’s survival on this is whether the lost revenue was due to cock-up or conspiracy. The small number of protestors yesterday claim that it was a conspiracy to aid big business, evidenced by Hartnett’s frequent wining and dining.

Although this might be fanciful, a number of answers will help us decide: what was the error? When was this error spotted by HMRC? Why did Hartnett feel the need to settle when there was still a chance the impediment could be removed?

But it looks like the questions will never be answered. Hartnett used the cloak of taxpayer confidentiality to avoid these questions at the meeting of the Public Accounts Committee and the legal position of HMRC supports this approach. Until these questions are answered, the suspicion of conspiracy will remain.

What has been taken out of usual governance procedures?

Another question to come out of the Goldman Sachs affair was HMRC’s governance structures. A deal such as Goldman Sachs would normally have gone through the Revenue’s high risk corporate programme.

The programme deals with cases where the total tax under consideration is greater than £100m and there is a proposal for HMRC to accept less than 100% of the tax under consideration, or the issues are particularly sensitive. Once in the programme, the case is reviewed by the board, chaired by the director of large business service at HMRC and comprising the directors of the relevant HMRC departments.

However, cases must be taken out of the programme and put in the hands of commissioners where the tax under consideration is above £250m, “has potential to create adverse national publicity, cause questions to be raised in Parliament or represents a significant departure from previous HMRC policy”, according to HMRC guidelines.

As we have seen, the Sachs deal certainly falls under this definition. But Hartnett told the PAC that three other deals were taken out of the programme. It is assumed that one of these cases was Vodafone’s tax wrangle over its controlled foreign companies.

But what were the other two? Admittedly, Hartnett would not be able to make these cases public because of his hard stance on taxpayer confidentiality, although before this stance it would not have been hard to construct a public interest case for making the details public.

The public only knows about the error in the Goldman Sachs case because of leaks, and there was justifiable anger about it. If and when these other two cases are made public, that could be the final straw for Hartnett. There will be far more questions that he might fail to have the opportunity to answer.

Lack of tax experience at the top

Taking cases out of the high risk corporate programme isn’t a problem in itself. The problems in the Goldman Sachs affair came because Hartnett took on the dual role of meeting with the taxpayer and then signing off the deal.

Hartnett had previously told the Treasury Select Committee that he did not deal with Goldman Sachs’ tax affairs. At the PAC meeting months later, it became clear that this was a judicious use of semantics. No commissioner is supposed to sign off a deal that he or she had been party to. Hartnett’s presence at the meeting has therefore been questioned.

The permanent secretary for tax was present at the meeting because there was a “deterioration” in the relationship between Goldman Sachs and HMRC, so he stepped in to attempt to reach an agreement. But he signed off the deal because, perhaps shockingly, Hartnett is the only one of the four commissioners with any tax experience.

The current staffing situation makes it even tougher on its governance structures. Dame Leslie Strathie is sadly on sick leave and is not due back soon. HMRC are currently in the process of appointing two more commissioners, one with tax experience.

But, even with these new appointments, are two tax commissioners enough for the Exchequer’s revenue-raising department? Or will Hartnett, its very public face, still be judge, jury and executioner on high profile agreements?

Have I Got News for You

There is no doubt these have been two tough weeks for the permanent secretary. The two biggest stories, PAYE and Goldman Sachs, has undermined his standing.

But he currently remains too big to fail. And the very fact that he is the one appearing at the PAC – and the focus of public protests – means that Cabinet secretary Gus O’Donnell will be reluctant to lose HMRC’s big hitter. After all, ironically, there are not too many public servants with the profile that attracts protests.

Big questions remain and HMRC could have handled the Goldman Sachs affair better. Hard work is needed to prevent even bigger problems for PAYE when real time reporting is introduced. Because the next big scandal might well be the one to bring Hartnett’s reign to an end and the only time we’ll see him is on repeats on Parliament TV.