'Sweetheart' deal between HMRC and Goldman Sachs was struck to save Government embarrassment, court hears

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A “sweetheart” tax deal which saved Goldman Sachs millions of pounds was agreed by HMRC to save Chancellor George Osborne from “major embarrassment”, a court has heard.

Dave Hartnett, who was the top ranking civil servant at Her Majesty’s Revenue and Customs, agreed the deal at the offices of the investment bank in November 2010.  The deal, which allowed the bank to escape paying between £6m and £20m in interest owed to the Exchequer, has since become the subject of a legal challenge by UK Uncut, the tax pressure group.

It has emerged that Mr Hartnett emailed a colleague at the time of the deal warning that Mr Osborne would face embarrassment unless Goldman Sachs was kept happy. A week ago, the Chancellor had publicly announced the government was taking action on tax avoidance by big banks, and had forced the UK’s fifteen largest banks, including Goldman, to sign up to a new code of practice on taxation. HMRC apparently feared that Goldman would pull out of the code unless it was let off the tax.

Mr Hartnett’s email read: “The risks here are major embarrassment to the [Chancellor of the Exchequer], HMRC, the [large business service of the HMRC], you and me, not least if GS withdraw from the code.”

Ingrid Simler QC, acting for UK Uncut, told the court that the email was “the best evidence there is” of Mr Hartnett’s thinking before the tax deal was finally approved on December 9 2010.

In Mr Hartnett’s written witness statement, he asserted that: “Goldman Sachs had been involved in tax avoidance in the past and we regarded their signing of the Code as a valuable step in securing improved tax behaviour from them. This would have been under threat had we reneged on the settlement (they said they would withdraw from the Code if HMRC reopened the settlement).”

UK Uncut wants the High Court to declare the deal unlawful, but even if it does so, the tax settlement cannot be overturned. Goldman Sachs will not be obliged to pay the money.

James Eadie QC, acting for HMRC, told the court that the UK Uncut legal action was launched during a period in which stories were emerging in the media about “cosy backroom deals” and of “sacrificial lambs and favourites”.

“Big business being let off was the general theme of that reporting,” he said. An investigation into that deal and four other tax settlements involving big companies has since been undertaken by the former judge Sir Andrew Park, which concluded that the deals were “fully compatible” with HMRC rules.

HMRC maintained at the hearing that the deal with Goldman Sachs was within the proper ambit of its discretion. Mr Eadie said that the “guts had been taken out of the litigation” because the judicial review was unable to quash the deal.

A ruling is not expected for several months, but the emergence merely of the email stating the agreement had the potential to be a “major embarrassment” to the Chancellor, will in itself be an embarrassment to the Chancellor.

Anna Walker, campaigns director at UK Uncut Legal Action, said: “This case shows the lengths that the government will go to in order to preserve the public perception that government is getting tough on tax avoidance.”