HMRC’s Goldman accounting error

THE BIG question in the tax community at the moment concerns the error made by HM Revenue & Customs (HMRC) in its deal with investment bank Goldman Sachs, which lost the Exchequer up to £10m.

Speculation is mounting over the nature of the error, while tax officials claim it is confidential. HMRC permanent secretary Dave Hartnett spoke of an “impediment” that prevented HMRC from claiming the full amount, but will say no more.

HMRC’s deal with the investment bank centres on an employee benefit trust run by Goldman Sachs. Between 2002 and 2005, HMRC closed down numerous schemes that allowed employees to receive non-repayable loans that did not incur National Insurance contributions. HMRC managed to extract the full amount owed from 21 businesses: Goldman Sachs was the only one to hold out.

HMRC said the refusal to pay would mean that the bank would have to pay interest on the bill when it was finally paid. However, the deal struck in 2010 failed to charge Goldman Sachs interest.

How much money was lost by the HMRC is unclear. Private Eye and the Guardian, which broke the story, have mentioned the sum of £10m.

However, the most reliable figure appears to be the sum mentioned by the National Audit Office, which said that about £5m to £8m was lost by the HMRC when the settlement was made.

HMRC has admitted that the loss of the revenue was due to an error. But despite vigorous questioning from the Public Accounts Committee, HMRC has continued to cite taxpayer confidentiality and legal privilege, so the nature of the error remains undisclosed.

An examination of court papers from two related cases offers some clues. HMRC’s failure to take a 2009 tribunal ruling into account when agreeing the deal with Goldman could have been a contributing factor. The ruling removed a time limitation obstacle that would have prevented HMRC from pursuing the bill.

The first case was heard in October 2009: Justice Norris ruled that a preliminary hearing was required to explore the issue of who was liable to pay the National Insurance contributions. The preliminary hearing is the second case, and took place in December 2009. It was heard by Judge David Williams.

Norris found HMRC had been pursuing Goldman Sachs International (GSI) for the outstanding NI liabilities from 2002. It commenced County Court proceedings against GSI in 2003, but the case was never heard. This was not a major problem, however: the relevant legislation states that it was not bound by time limitations, because proceedings had started.

However, Goldman Sachs claimed that HMRC was pursuing the wrong business within its group for tax. Because of this, the bank said, HMRC had run out of time to pursue the correct business – a different Goldman Sachs subsidiary based in the British Virgin Islands. But the tribunal ruled that HMRC had been pursuing the right business all along, removing any possible obstacle to collecting the full revenue, as well as any interest.

HMRC has said it cannot comment for legal reasons.