Treasury Committee

PRESS NOTICE

Session 2002-03 No. 18 12 February 2003

REPORT PUBLISHED ON THE HANDLING OF THE JOINT INLAND REVENUE/CUSTOMS AND EXCISE STEPS PFI REPORT

The Treasury Committee today published its Fourth Report, The handling of the joint Inland Revenue/Customs and Excise STEPS PFI project (HC 184, Session 2002-03).

Michael Fallon MP, Chairman of the Treasury Sub-Committee which undertook the inquiry said:

“We were astonished at the evidence we heard when we examined how this project, which involved the transfer of some 600 Inland Revenue and Customs and Excise properties to an offshore company registered in Bermuda, has been handled. The Inland Revenue, the department responsible for implementing the Government’s policy of reducing tax avoidance, should have been aware of the difficulties of being party to a deal that transferred ownership of its own properties to an offshore company. But the officials and advisers concerned did not recognise these difficulties and both the Minister concerned and the Customs and Excise Management Committee were not told of the offshore structure of the contract before it was signed. The Board of the Inland Revenue did know that its properties would be transferred to Bermuda, but it learned that this would be the case only a few days before the contract was due to be signed, and only because one of its members asked about the structure of the MapeleyGroup.

We were equally disturbed to learn that  only seven months after the twenty year contract was signed the Departments were asked by Mapeley for a substantial cash settlement to alleviate its cash flow problems. Despite the Minister’s “strong reservations about paying increased amounts to Mapeley” the Departments sent two “comfort” letters to Mapeley to reassure Mapeley’s auditors, bankers and shareholders about the state of negotiations regarding a financial settlement. These appear, from the financial statements of Mapeley STEPS Contractor Limited, to have been fundamental to the company being viewed as a “going concern” despite net liabilities of over £23 million at 31 December 2001. We are astonished and concerned that these letters of comfort were not brought to the attention of the Board of the Inland Revenue or the Customs and Excise Management Committee before they were sent and that again the Minister responsible was not informed.

We are concerned at the evidence from this project of officials repeatedly failing to inform or seek Board level approval at appropriate times. Similarly, the responsible Minister was not informed of key events before they took place and she is, in our view, right to be deeply disappointed by the service she received. We consider these to have been serious lapses, well below the standards expected, by all the officials concerned  ”

Note for Editors

Mr Michael Fallon MP is available for comments on the report on 0797 367 6506.  The Report can be purchased from the Stationery Office Bookshops (tel: 0345 58 54 63). The full text will also be available on the Internet (www.parliament.uk) from 3.30 pm today.

List of the Report's conclusions and recommendations

In this short inquiry we have examined the way the STEPS project was handled administratively by the Departments. We have not sought to examine the STEPS contract in detail and we have not come to any conclusions as to its merits for the Departments. The National Audit Office has indicated in its forward programme document that it proposes to examine the STEPS PFI project and we look to its report to determine whether value for money was obtained for the taxpayer.

We note the Inland Revenue's view that it is not correct to describe the offshore structure adopted by Mapeley for the contract as tax avoidance. But on the basis of Mapeley's own evidence to the Committee it had "structured its tax affairs to minimise exposure to Capital Gains Tax ..." Tax avoidance was clearly one of Mapeley's objectives in the way the deal was structured.

We accept both that Mapeley was entitled to minimise its tax liabilities and the evidence that the avoidance of tax in this case was legal. However, we consider that the Inland Revenue, responsible for implementing the Government's policy of reducing tax avoidance, should of all departments have been alert to the difficulties of being party to a deal that transferred ownership of its properties to an offshore company. We are concerned that these difficulties were not recognised at the time.  We regard the fact that the project team did not explore with Mapeley the possibility of an alternative structure to the deal that might have avoided them as a failure in the way the project was handled.

We were told that even if the properties had been transferred to a UK based company, nothing in the contract could have prevented a subsequent restructuring of the consortium to transfer them to an offshore company. While this may be the case, this argument ignores the tax liabilities that could arise for a company resident in the UK transferring assets offshore.

The Departments maintain that procurement law prevented them excluding bidders from using an offshore tax structure and that this was confirmed recently by advice from leading Counsel.  We recommend that procurement guidance be reviewed to ensure that it contains comprehensive advice on this matter.

We also recommend that further advice is sought and published so as to clarify whether it is possible to exclude bidders using an offshore tax haven in similar circumstances, and to restrict final beneficial ownership to companies registered in countries that have signed the agreement on Government Procurement.  In particular, advice should be sought as to whether specifying this exclusion in the tender advertisement makes it lawful.  We further recommend that the Treasury explores whether adjustments should be made to contract bids to reflect loss of tax revenue as we believe is the practice in the United States.

The Board of the Inland Revenue was not informed by the project team that, under the contract, the Revenue's properties would be transferred to a company registered in Bermuda. The Board appears to have discovered this fact a few days before the contract was due to be signed only because one of its members, knowing that arrangements of this sort were common, asked what the structure of the Mapeley companies was. The Customs and Excise Management Committee and the relevant Minister, the Paymaster General, were not told of the offshore structure of the contract before it was signed.  We reject the proposition put forward by the Chairman of the Inland Revenue that at worst the charge against the project team is one of naivety, a view we believe is complacent. We view with great concern the fact that such failures in briefing senior management and the Minister have occurred. We expect the Departments to have identified exactly where and how things went so seriously wrong and to have taken the necessary steps to prevent a recurrence.

A joint Inland Revenue and Customs and Excise press release in March 2001 announcing the signing of the contract, and the Revenue's Annual Report, wrongly refer to the transfer of the estate to a UK incorporated company rather than one registered in Bermuda. These errors were not corrected until September 2002, some 18 months after the initial mistake. Customs and Excise's Annual Report refers to the wrong company as the STEPS contractor. Parliament and the public rightly expect information provided by Government departments to be accurate. In this case errors have been made in describing the contract on several occasions. While we acknowledge that the Departments have corrected their previous statements, this standard of performance is not acceptable.

It is clearly a matter of concern that only seven months after the twenty year contract was signed the Departments had been asked to provide a substantial cash settlement to alleviate Mapeley's cash flow problems. This must cast doubts on the robustness of Mapeley's bid and the standard of due diligence work undertaken by the Departments and their advisers before the contracts were signed. We are also concerned that the Departments' negotiating position with Mapeley appears to have been weakened by the concern that there would be serious operational difficulties and very substantial additional costs for the Departments if Mapeley failed financially. We consider this to be a matter that should have been addressed and resolved before the contract was signed. We look to the National Audit Office to examine these aspects of the project as part of its value for money study.

We note the Departments' view that most of the financial pressures arose from areas where risks had been transferred to Mapeley. But the Departments' evidence was also that changes in their requirements and the bedding down of the contractual arrangements had affected Mapeley's cash flow. We are concerned that this state of affairs indicates weaknesses in the original contract which will have to be addressed in the ongoing negotiations with Mapeley. The fact that these may result in a more satisfactory settlement for the Departments than at first seemed possible appears to have been the result of fortuitous movements in the stock and property markets.  We look forward to learning the outcome of these negotiations which we will report to the House.

We are concerned that the financial crisis faced by Mapeley so soon after entering the contract, and the potential consequences of the company going bust, undermines one of the key stated objectives of this deal-to transfer risk to the private sector.

Despite the Minister's "strong reservations about paying increased amounts to Mapeley" the Departments sent two letters to Mapeley to reassure Mapeley's auditors, bankers and shareholders about the state of negotiations regarding a financial settlement. These appear, from the financial statements of Mapeley STEPS Contractor Limited, to have been fundamental to the company being viewed as a "going concern" despite net liabilities of over £23 million at 31 December 2001. We are surprised that the officials who saw a draft of the relevant "going concern" note in advance of these financial statements being published did not appreciate its significance. This was a serious failure.

Government Accounting requires departments to approach any request for a letter of comfort with a strong predisposition to reject it. Following the Treasury Officer of Accounts advice, it appears that the Departments have issued two letters of comfort to Mapeley without realising it. We note the Departments' view that their letters have not created any contingent liabilities for the Government, but we are concerned, as Government Accounting itself points out, that the letters may have led to a moral obligation and could lead to threats of legal action.

The letters of comfort were not brought to the attention of either the Board of the Inland Revenue or the Customs and Excise Management Committee before they were sent and  the requirements of Government Accounting were also overlooked. Again the Minister responsible was not informed. We are astonished, and extremely concerned, that such failures can have occurred. We consider these to be serious lapses in the standards required from officials and we expect the Departments to have identified exactly where and how things went so seriously wrong.  We expect them also to have taken all necessary steps to prevent a recurrence.

We are concerned at the evidence from this project of officials repeatedly failing to inform or seek Board level approval at appropriate times. Similarly, the responsible Minister was not informed of key events before they took place and she has, in our view, the right to be deeply disappointed by the service she received. This is not the first time that we have encountered such problems in the course of our work and we recommend that a  review be undertaken of the relationship between Treasury Ministers and the bodies for which they are accountable to ensure appropriate standards of governance and accountability are met.

The Treasury Committee is a Select Committee of the House of Commons, appointed to examine the expenditure, administration

and policy of the Treasury, the Inland Revenue, Customs and Excise and associated public bodies.

Mr John McFall (Chairman), L, Dumbarton

Mr Nigel Beard, L, Bexleyheath and Crayford

Mr Jim Cousins, L, Newcastle upon Tyne Central

Angela Eagle, L, Wallasey

Mr Michael Fallon, C, Sevenoaks (Sub-Committee Chairman)

Norman Lamb, Lib Dem, North Norfolk

Mr George Mudie, L, Leeds East

Dr Nick Palmer, L, Broxtowe

Mr James Plaskitt, L, Warwick and Leamington

Mr David Ruffley, C, Bury St Edmunds

Mr Andrew Tyrie, C, Chichester