karlpejera: HMRC tax deal with Vodafone 'may have been illegal'

Parliamentary committee examines claims that waiving tax bill of up to �7bn was outside HM Revenue and Customs's powers

A highly controversial tax deal which cost the public purse billions may have been illegal, according to allegations being examined by a powerful parliamentary committee.

The public accounts committee is considering claims from a whistleblower who says that an agreement to waive a potential tax bill of up to �7bn from Vodafone may have been outside the powers of HM Revenue and Customs (HMRC).

Separately, the whistleblower has also claimed that an agreement that HMRC officials claimed let the US-based bank Goldman Sachs off less than �10m was actually worth about �20m to taxpayers.

The committee wants to commission a QC to examine the allegations in depth.

The move could cause further problems for Dave Hartnett, the head of HMRC, who has admitted making mistakes while settling high-yield tax disputes with multinational companies.

He is already facing an independent investigation from a judge who has been commissioned by the National Audit Office to examine the deals.

Margaret Hodge, who chairs the committee, said she had received the new allegations from someone with an apparent detailed knowledge of the deals and confirmed that a senior counsel may now assess them.

"The main allegation is that senior officials at Revenue and Customs have acted ultra vires [beyond their powers] and we are duty bound to take that seriously," she said.

Hartnett has been accused of letting Vodafone forgo a reported �6.75bn in tax when settling a longstanding dispute with the company.

The dispute began 11 years ago when Vodafone acquired the German engineering company and mobile phone operator Mannesmann in one of the biggest takeover deals ever.

A deal was settled in July 2010, which according to those with knowledge of it included estimates of future profits for Vodafone for the years 2011 and 2012.

According to the whistleblower's submission to the committee, the estimate of future profits is ultra vires. There is no implication that Vodafone has done anything wrong.

The future payments part of the deal was raised at a public accounts committee last month by Stephen Barclay, the Conservative MP for north-east Cambridgeshire, who is a member of the committee.

While questioning a senior HMRC official, he asked: "[The settlement] seems strange on a number of levels. First it included the 2011 and the 2012 profit but given the settlement was reached in 2010, I would welcome your thoughts on how they knew what the profit would be in 2012?" HMRC officials responded by saying they could not answer because of legal privilege.

Documents sent to the committee by a whistleblower and seen separately by the Guardian allege that HMRC does not have the powers to include estimates of future earnings.

The submission points to counsel's opinion received by HMRC that a previous deal on future tax payments was outside of its jurisdiction and therefore not enforceable.

Barclay told the Guardian on Monday that the committee hoped to engage a QC who could not only analyse the new allegations, but also advise on how the committee could compel Hartnett and other key HMRC officials to hand over more information about high-yield tax deals.

"The QC would be vital in looking at all of the evidence before the committee and tell us where we can go next to bring more information before parliament.

"Despite three appearances by Mr Hartnett and other senior officials before the public accounts committee, serious concerns remain," Barclay said.

"To date Mr Hartnett has avoided full scrutiny by citing legal privilege. That defence may no longer hold."

The Goldman Sachs deal was sealed between bank executives and Hartnett in December 2010 but dated back to 1997 in a dispute over national insurance contributions.

Hartnett, who denied misleading parliament over the agreement, told the committee in October that the amount of money waived was less than �10m.

New claims sent to the committee, which have been seen by the Guardian, suggest that the amount owed on the sum may be closer to �20m.

Evidence submitted includes a tax tribunal ruling from 2009. Mr Justice Norris, in his ruling, said that Goldman Sachs's barrister had stated that the total liability to National Insurance contributions was �40m.

Another document sent to the committee appears to show that the principal amount at stake between the two parties was �23.2m.

In the leaked letter, sent in October 2005 by a tax investigator to Michael Housden, the tax director of Goldman Sachs, the investigator writes that "should litigation be necessary to resolve matters then interest will continue to accrue on the principal NIC debt".

According to one senior tax lawyer, this means that in 2009 the amount of interest owed was �17m.

Given accrued interest, by the time Hartnett "shook hands", the interest would have increased to around �20m, according to the new claims.

In a sign of how seriously the government regards the problems facing HMRC, Sir Gus O'Donnell, the cabinet secretary, has also announced the appointment of two new commissioners with tax expertise to oversee large tax settlements.

The commissioners, who are appointed by the crown to represent the interests of the taxpayer, are the only people who have the authority to sign off such deals with large companies.

Previously HMRC had only four commissioners, and just one of them, Hartnett, had direct experience of dealing with highly complicated tax liability issues.

A spokesman for HMRC said: "We are entirely confident that our approach to large business tax settlements is the right one. This approach has brought in more than �13bn from large businesses since 2006.

"We have not seen the material which the Guardian tells us may be referred for counsel's opinion so it would be wrong to comment further."

Regarding the Goldman Sachs deal, the spokesman added: "Dave Hartnett's evidence to the PAC [public accounts committee] is entirely consistent and accurate.

"Mr Hartnett made clear that an error occurred and the comptroller and auditor general is on record as saying this error was between �5m and �8m."

Rajeev Syal