Written evidence submitted by Mr Osita Mba CTA
INTRODUCTON
1. I provided your Committee with written evidence and further written evidence on the Goldman Sachs tax settlement on October 6, 2011 and further written evidence on the Goldman Sachs and Vodafone tax settlements on November 21, 2011 under the provisions of the Public Interest Disclosure Act 1998.
2. A peer-reviewed version of the accompanying legal opinion dated 6 October 2011 on the confidentiality and disclosure provisions in the Commissioners for Revenue and Customs Act 2005 (‘CRCA 2005’) – ‘Transparency and Accountability of Tax Administration in the UK: The Nature and Scope of Taxpayer Confidentiality’ - was published in [2012] British Tax Review, No 2, pages 187-225.
3. I resigned from HMRC in August 2013 and have been undertaking a PhD research in law at the Institute of Advanced Legal Studies, University of London since September 2013. The title of my thesis is ‘Cheating the Public Revenue: The Nature and Meaning of ‘Tax Avoidance’ and ‘Tax Evasion’ in English Law’.
4. I have followed your Committee’s excellent work on tax in the last and present Parliaments with very keen interest. In view of the recurrence of the issues raised in my previous evidence and their damaging effect on public confidence in the tax system, I would like to contribute to your inquiry on Corporate Tax Deals in order to, amongst other things, highlight the underlying political, legal and administrative issues that require serious and urgent consideration. In the words of Mr Justice Walton said in Vestey v Inland Revenue Commissioners [1977] STC 414 at 439:
“I conceive it to be in the national interest, in the interest not only of all individual taxpayers, which includes most of the nation, but also in the interests of the Revenue authorities themselves, that the tax system should be fair. ... A tax system which enshrines obvious injustices is brought into disrepute with all taxpayers accordingly, whereas one in which injustices, when discovered, are put right (and with retrospective effect when necessary) will command respect and support.”
5. I am member of the Law Society of England and Wales, the Chartered Institute of Taxation and the Association of Taxation Technicians but I am providing this evidence in a personal capacity.
HMRC’S DISCRETION TO STRIKE CORPORATE TAX DEALS
6. As I indicated in my previous evidence to your Committee, the systemic injustice often described as “one rule for the large businesses and wealthy individuals and another for the general body of taxpayers” is a symptom of the effective primacy of the Revenue’s administrative discretion over the law of the land.
7. Corporate tax deals are, therefore, better understood in the wider context of HMRC’s discretion and the policies of successive governments that drive HMRC’s discretionary approach to large businesses.
8. The reported statement by the French finance minister that the Google settlement “seems more the product of a negotiation than the application of the law”, for example, is consistent with the terms of the Treasury’s Corporate Tax Road Map that commands (at paragraph 3.21) “responsible judgements from both large businesses and HMRC as to how the law is interpreted on a day-to-day basis.”
9. HMRC’s frequent statement that they collect the “full tax due in law” from large businesses belies fundamental distinctions between: (a) the “full tax due in law” as determined by a court of law; (b) the “full tax due in law” as determined independently by HMRC officials; and (c) the “full tax due in law” as agreed between HMRC officials and a large company.
10. Google’s apparent mantra – “Governments make tax law, the tax authorities independently enforce the law, and Google complies with the law” – must, therefore, be seen in the context of your Committee’s pertinent observation (Tax Avoidance-Google, HC 112, June 2013) that “HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment.”
11. In my further written evidence dated 21 November 2011 (HC 1531, EV141-142) I noted that the duty imposed on HMRC by Parliament is to collect tax as it falls due in respect of actual transactions. The case of Al Fayed and Others v Advocate General for Scotland (representing the Inland Revenue Commissioners) [2004] STC 1703 established the principle that HMRC’s administrative discretion does not extend to entering into an agreement with a taxpayer as to their future tax liability.
12. I argued, therefore, that the Vodafone settlement could be beyond the powers of HMRC to the extent that it included the company’s future tax liabilities. According to the Interim Management Statement issue by Vodafone Group Plc on 23 July 2010:
“UK CFC Settlement
On 22 July 2010 Vodafone reached agreement with the UK tax authorities with respect to the CFC tax case. Vodafone will pay £1.25bn to settle all outstanding CFC issues from 2001 to date and has also reached agreement that no further UK CFC tax liabilities will arise in the near future under current legislation. Longer term, no CFC liabilities are expected to arise as a consequence of the likely reforms of the UK CFC regime due to the facts established in this agreement. The settlement comprises £800m in the current financial year with the balance to be paid in instalments over the following five years.”
13. It is very doubtful whether the NAO dealt sufficiently with this point. For present purposes, however, the principle in Al Fayed should apply to any forward tax agreement included in the Google tax deal.
14. HMRC’s failure to prosecute the blatant tax evasion perpetrated by HSBC, their staff and customers fatally undermined their frequent protestations that they are hampered by the existing law from tackling tax avoidance.
15. The HSBC tax amnesty, which has raised £142 million (according to HMRC’s evidence to your Committee on September 9, 2015) of the £3-£5 billion forecast by the Chancellor of the Exchequer in 2013, is as much a “sweetheart” deal for HSBC resulting from the exercise of HMRC’s discretion as the Google tax settlement. Indeed, the Permanent Secretary for Tax, who was instrumental in the Vodafone and Goldman Sachs settlements, also played a key role in the amnesty, before going to work for HSBC as a consultant when he retired in 2012.
16. A fundamental part of the amnesty - the Agreement between the United Kingdom of Great Britain and Northern Ireland and the Swiss Confederation on Cooperation in the area of Taxation signed on 6 October 2011 – was HMRC’s pledge in the ‘Letter from HMRC on Criminal Investigations that HSBC’s customers are “highly unlikely to be subject to a criminal investigation by HMRC”; and that “it is highly unlikely to be in the public interest of the United Kingdom that professional advisers, Swiss paying agents and their employees will be subject to a criminal investigation by HMRC.”
17. In effect, the admission by HMRC’s director of fraud investigation service before your Committee on 13 January 2016 - “We do not have a current criminal investigation in relation to any entities connected with this data” – would almost certainly have been preordained.
18. In fact, the oft-cited solitary prosecution of Mr Michael Shanly (who pleaded guilty to one count of cheating the public revenue at Wood Green Crown Court on July 4, 2012) resulted from the so-called civil investigation of fraud ('COP 9') procedure carried out before the HMRC received the Swiss data. According to HMRC’s press release dated 5 July 2012:
“Michael Shanly previously failed to disclose a Swiss offshore account to HM Revenue & Customs (HMRC), during a civil enquiry where he was found to owe HMRC around £1∙5m. This was discovered when information about UK taxpayers with HSBC bank accounts in Geneva was handed over to HMRC. Checks were then made to establish whether these account holders had declared and paid what they owed.”
19. There is, therefore, no evidence that HSBC did not enjoy the priceless immunity from criminal investigation and prosecution it (and its staff and customers) would have expected under the amnesty.
20. The suggestion by HMRC in the “Statement by HMRC on tax evasion and the HSBC Suisse data leak” dated 14 February 2015 (following the revelations by the International Consortium of Investigative Journalists in February 2015) and in evidence to your Committee in February and September 2015 that criminal investigation was ongoing or imminent is, therefore, very questionable. The exchange between Mr Phillips MP and Ms Homer Ms Granger on September 9, 2015 (Q52-Q58) is particularly revealing.
21. Furthermore, the claim in the “Statement by HMRC on tax evasion and the HSBC Suisse data leak” – “We have also requested copies of the data from The Guardian, BBC Panorama and the International Consortium of Investigative Journalists, in order to compare it with ours, and we are in discussions with the French authorities to find out if there is any additional data that we have not already been given” - flies in the face of the “Declaration of the United Kingdom concerning the acquisition of customer data stolen from Swiss banks” on the signing of the amnesty on 6 October 2011:
“The Government of the United Kingdom declares on the occasion of the signing of the Agreement between the United Kingdom of Great Britain and Northern Ireland and the Swiss Confederation on cooperation in the area of taxation that it will not actively seek to acquire customer data stolen from Swiss banks.”
22. In view of the pivotal role of Swiss banks in facilitating tax evasion and indeed tax avoidance, this is an extraordinary undertaking. Indeed, the wider constitutional, legal and administrative implications of this declaration do not seem to have received the required consideration.
TRANSPARENCY AND ACCOUNTABILITY OF CORPORATE TAX DEALS
23. As your Committee would be fully aware, section 18(2)(a) of the CRCA 2005 gives HMRC the discretion to disclose taxpayer confidential information but HMRC have consistently refused to disclose relevant information about tax settlements and other matters to your Committee.
24. Your Committee would, therefore, be interested to know that in defending a recent judicial review claims that HMRC breached the provisions of the CRCA 2005 on taxpayer confidentiality when Mr Hartnett briefed journalists from The Times newspapers on June 14, 2002, HMRC argued in R (on the application of) Ingenious Media Holdings Plc & Anor v HM Revenue & Customs [2013] EWHC 3258 and R (on the application of) Ingenious Media Holdings Plc & Anor v HM Revenue & Customs [2015] EWCA Civ 173 that they have the discretion to disclose taxpayer confidential information to journalists in order to maintain public confidence in the tax system under section 18(2)(a) of the CRCA 2005 and that this was part of their functions under the Act.
25. In upholding HMRC’s contention the High Court (at paragraph 44) and the Court of Appeal (at paragraph 30) stated:
“It is also relevant to the exercise of HMRC's functions to provide proper and accurate information to correct mis-apprehensions or captious criticism regarding the exercise of their functions (such as any misplaced suggestion that they had engaged in unduly lenient ‘cosy deals’ with certain taxpayers), in order to maintain public confidence in the tax system. If such confidence were undermined, the efficient collection of taxes could be jeopardised, as disaffected taxpayers might withhold co-operation from the tax authorities.”
26. Your past chair summarised my evidence to your Committee to similar effect when she stated in response Dame Homer’s statement – “I’m afraid that I don’t agree that I have discretion in this area” – during your hearing on June 27, 2012 (Q7), two weeks after the disclosure to The Times’ journalists, thus:
“I think we can pursue this. I simply have to record what I think is the Committee’s view: there are at present so many question marks hanging over whether or not the settlements are in the public interest and properly defend the taxpayer’s interest, and are fair and equal before the law, that it would really help you to satisfy Parliament and, through Parliament, the public, if you were able to disclose to us, even in private - and we would keep it in confidence - some of the papers that have given rise to enormous questions about whether your Department - the Department for which you are now responsible and accountable - is really acting properly and protecting the taxpayer’s interest.”
27. It would, therefore, be a grave insult to Parliament and the public if HMRC were to resile from this judicially-approved position when they appear before your Committee on Thursday.
28. On the Andrew Marr Show on January 31, 2016 Google’s Vice President of Communications seemed to agree that “we should surely know more about the actual negotiations and how they were conducted”, saying:
“We ... obviously operate under the principle of taxpayer confidentiality ... We would like to see more simplicity and more clarity, not least because we would like to be seen to be paying the right amount.”
29. Any impression that taxpayer confidentiality prevents Google from bringing clarity to the tax deal is unfounded. Section 18(2)(h) of the CRCA, for example, provides that the general prohibition in section 18(1) does not apply to a disclosure “which is made with the consent of each person to whom the information relates.” In other words, Google can disclose and/or authorise HMRC to disclose any relevant information required by your Committee. This independent of HMRC’s discretion to disclose under section 18(2)(a).
THE FALLACY THAT ‘TAX AVOIDANCE IS LEGAL AND TAX EVASION IS ILLEGAL’
30. The fallacy that “tax avoidance is legal and tax evasion is illegal”, which has blighted public and Parliamentary debates on tax for too long, and which your Committee would no doubt be confronted with in the course of this inquiry, also rests for its support upon the Revenue’s discretion.
31. It is entirely within HMRC’s discretion whether they resolve a tax dispute by criminal prosecution or civil litigation or administrative settlement where fraud is suspected. If, exceptionally, HMRC prosecute a tax avoidance scheme successfully it becomes “illegal tax evasion”. On the other hand, when HMRC litigate a tax avoidance scheme (which is virtually always the case where there has been no administrative settlement) it remains “legal” tax avoidance, even if the litigation is successfully and the court finds that the scheme is legally ineffective. The fallacious notion of “legally ineffective, legal tax avoidance” reflects the fallacy that “tax avoidance is legal and tax evasion is illegal”.
32. In broad conceptual terms, “tax avoidance” usually refers to cheating by fraudulent misrepresentation of tax liability or making a false return (which corresponds to fraud by false representation under section 2 of the Fraud Act 2006). In contrast, “tax evasion” usually refers to cheating by fraudulent concealment of tax liability or failing to make a return (which corresponds to fraud by failing to disclose information under section 3 of the Fraud Act). (See for, example, Lord Templeman’s classic statement in Commissioner of Inland Revenue v Challenge Corporation Ltd [1986] STC 548 at 554-555 and HM Treasury and HM Revenue & Customs - Tackling tax evasion and avoidance, Cm 9047, March 2015, page 5).
33. In practice, however, a fundamental consequence of the Revenue’s discretion is the legitimisation of fraudulent misrepresentation of tax liability as “perfectly legal tax avoidance”, particularly in relation to large companies whose tax affairs are usually resolved administratively by tax deals.
34. The fiction that the types of facts your Committee sets out under the heading “Google's evidence to the Committee” (HC 112, pages 7-10) are “within” the criminal and civil laws of England and Wales, guarded jealously by a captive HMRC leadership, is as costly to the general body of taxpayers as it is convenient for the tax avoidance industry. As your Committee concluded (HC 112, page 3)
HMRC has not been sufficiently challenging of multinationals' manifestly artificial tax structures. We accept that HMRC is limited by resources but it is extraordinary that it has not been more challenging of Google's corporate arrangements given the overwhelming disparity between where profit is generated and where tax is paid. Inconsistencies between the form of the company's structure and the substance of its activities only came to light through the efforts of investigative journalists and whistleblowers. Any common sense reading of HMRC's own guidance and tests suggests HMRC should vigorously question Google's claim that it is acting lawfully. In contrast to evidence given to us previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK.
35. In the event, the Government (Treasury Minutes, Cm 8697, September 2013, page 14) disagreed with your recommendation that “HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax”.
36. The French and Italian tax authorities started their ongoing criminal investigations into Google’s Irish tax arrangements apparently without the benefits of the efforts of investigative journalists and whistleblowers available to HMRC.
37. Moreover, HMRC’s entrenched a priori exclusion of the criminal law in their dealings with large businesses not only undermines the public revenue but also subverts the rule of law. As one commentator noted (“Watchful”, ‘Common Law Prosecutions for Revenue Fraud’ [1956] British Tax Review 119):
“All taxation is the creature of statute [but] the Tax Acts are but a part of the general law of the land. Just as, on the one hand, nobody can be taxed otherwise than in accordance with the law, so it can and should be insisted that the whole of that law is relevant in any question concerning taxation.”
38. I will expatiate upon these three broad themes in a separate further written evidence.