This year was not a good one for HMRC or its permanent secretary for tax, Dave Hartnett.
In truth the real damage goes back to the aftermath of the Inland Revenue-Customs merger in 2005, but for Hartnett this was the year when the chickens came home to roost.
Since its formation, HMRC has been in a state of perpetual transformation, where swingeing staff cuts coupled with the department’s traditional technology ineptitude contributed to an almighty backlog of unreconciled PAYE records as HMRC failed to validate its data properly before transferring it to the National Insurance and PAYE Service (NPS).
Each error generated a new record, creating a data mountain that delayed the usual annual reconciliation exercise for two years. The stink made national news headlines in 2010 and brought the department to the attention of various parliamentary committees in 2011.
Politically, Hartnett has been damaged goods since he was forced to apologise for telling Radio 4’s Moneybox programme last year he “saw no need to apologise” to the 1.4m people who were asked for additional amounts to offset their tax underpayments. But things got even worse as 2011 got underway.
The appearances of Hartnett and Dame Lesley Strathie, HMRC’s CEO, to explain the issues to the public accounts committee weren’t much better and fuelled a credibility gap with MPs that was to prove their ultimate undoing.
Hartnett and his minister, David Gauke, were summoned back to Westminster several times to answer questions from Chuka Umunna and other Treasury select committee members, and the Public Accounts Committee about what Private Eye called HMRC’s “Sweetheart tax deals”.
Private Eye has been relentless in its pursuit of this issue, bringing forward evidence from the Vodafone’s published accounts, for example, that showed it had made provisions for more than £2.2bn to settle its tax dispute over the acquisition of Mannesman that it settled for £1.25bn.
Private Eye also made a meal of Dave’s enthusiasm for networking with tax experts and large businesses such as Goldman Sachs, and branded him “Britain’s most wined and dined civil servant”.
Hartnett was accused of agreeing a deal with Goldman Sachs that reportedly waived interest of “smaller than £10m” on a £30m tax bill on bankers' bonuses paid through an offshore company in the British Virgin Islands.
After protests by UK Uncut calling for Hartnett’s resignation, evidence presented to the Public Accounts Committee in October by whistleblowing HMRC lawyer Osita Mba showed the unpaid interest amounted to around £20m and should have included £10.8m of interest accrued up to October 2005; the total liability facing the bank should have been £43m, not £30m.
When it presented its report into the disputes, the PAC commented: “Our understanding of how this case was settled is inhibited by the imprecise, inconsistent and potentially misleading answers given to us by senior departmental officials, including the permanent secretary for tax.
“In particular, his evidence to the Treasury Select Committee on his relationship with Goldman Sachs is less than clear given his evidence to us that he facilitated a settlement with the company over their tax dispute. We expect far greater candour from public officials involved in administering such an important area of government, especially when there is a question about whether HMRC acted within the law and within its protocols.”
But by the time the report was published in December, HMRC had already announced Hartnett’s impending retirement in June 2012. Chief executive Dame Lesley Strathie also left the department this month after a lengthy period of sick leave, so that she could concentrate on her battle with cancer.
The Strathie-Hartnett saga is laced with tragic symbolism. The year began with a chorus of calls for them to leave the department, and by its end the critics had got their way. Our tax editor Rebecca Benneyworth and many others who know him talk of Hartnett as one of the few effective “tax people” within HMRC and will be sad to see him go.
AccountingWEB member George Gill told of an episode earlier in his career that illustrated this point. When a junior tax inspector, Hartnett, encountered a road-surfacing contractor who worked as a sole trader and thus had no mechanism to issue multiple CIS certificates to his subcontractors. Rather than just say it was a pity but that was the way the system worked, Hartnett got on the phone to Somerset House in London, collared the senior official responsible for the system and told him it had to be changed, and changed quickly.
Such personal dynamism is laudable when carried out on behalf of a harassed individual, but not so desirable when applied to a multi-million pound tax settlement. Because he was willing to put his head above the parapet and argue about the mechanics of taxation, Hartnett became the public embodiment of HMRC.
But his media appearances and performances in front of MPs - painfully transcribed in the PAC’s evidence (PDF download) and on Parliament TV - demonstrated that an understanding of tax was not the same thing as understanding the mood of the great British public. In truth, with MPs and journalists in the loop, the two are probably mutually incompatible.
Partly through his own ego and arrogance, Dave Hartnett became the scapegoat for HMRC’s failures. George Osborne was reportedly exasperated by Hartnett’s Moneybox blunder in 2010, but stood by him. As the damaging disclosures dripped out during 2011 and pressure mounted, the Treasury finally had to cut Hartnett adrift. It’s a sad end to his public career, but the book is now open on whether or not the assiduous networker will reappear in the next year or so on the payroll of one of the many firms he has had dealings with.
For HMRC, however, there is still a lot of unfinished business ahead. If it’s lucky, the department may not feature as prominently in the national news headlines, but it still has to follow through on several major challenges. The PAYE backlog needs to be cleared before the computer system needs to be rigged up for Real Time Information and the Universal Credit. The government wants National Insurance Contributions, income tax and IR35 to be streamlined and to see movement on its plans for tax simplification. All of these will require a big dose of tax expertise. With Hartnett gone, will his successors be able to provide it?