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[Jan Klimkowski]

Repeat after me, all ye gullible children:

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Tax chief waived £20m owed by bank 'for fear of embarrassing chancellor'

Dave Hartnett overruled legal advice and HMRC guidelines to settle dispute with Goldman Sachs, high court hears

Rajeev Syal
guardian.co.uk, Thursday 2 May 2013 12.33 BST

Dave Hartnett, who wrote that rejecting a tax deal with Goldman Sachs risked 'major embarrassment' to George Osborne. Photograph: Sarah Lee for the Guardian

The former tax chief Dave Hartnett chose to waive up to £20m that Goldman Sachs owed to HM Revenue and Customs after expressing concerns that it would cause embarrassment to George Osborne and the tax authorities if they failed to settle the dispute, newly released documents suggest.

The previously unseen email has emerged at the high court where UK Uncut Legal Action, the anti-cuts campaign group, has brought a case challenging the decision to waive the charges by HMRC officials.

Hartnett personally overruled legal advice, the HMRC's own guidelines and HMRC's internal review board, which all stated that HMRC was in a position to force Goldman Sachs to pay back the money owed, the court heard.

Shortly after the oral deal had been made between Hartnett and Goldman to waive the £20m that the bank owed, the HMRC's high-risk corporate programme board, an internal oversight board, rejected the deal and recommended that negotiations be re-opened to recoup the money owed.

In the email, sent by Hartnett to other senior tax officials, he states that when Goldman Sachs was informed of the board's decision to reject the deal and force the bank to pay the interest, the bank "went off the deep end".

He also warns of potential political embarrassment, stating: "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."

In Hartnett's written witness statement, he states: "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)."

Hartnett says that this would be a source of embarrassment for Osborne because a week earlier the chancellor had publicly announced that the government was cracking down on tax avoidance by big banks and had successfully forced the top 15 banks, including Goldman Sachs, to sign up to the code of practice on taxation designed to reduce tax avoidance.

Ingrid Simler, for UK Uncut, said Hartnett's email showed he was worried by the prospect of embarrassing the chancellor. "There was a risk to the chancellor, that is admitted my lord, and it is disclosed in Dave Hartnett's witness statement," she said.

Hartnett says in his statement that Goldman's threat to withdraw from the government's code of practice for banks, which was published in December 2009, worried him.

"I was concerned that withdrawal would have embarrassed the chancellor, who had announced on 30 November 2010 that the top 15 banks including Goldman's had signed up to the code," Hartnett's witness statement reads.

Hartnett stood down as head of tax last summer, following stinging criticisms from the public accounts committee over the Goldman deal.

Murray Worthy, director of UK Uncut Legal Action, said the case had exposed a cover-up at the heart of government by HMRC and Hartnett to avoid political embarrassment for Osborne.

"George Osborne announced the bankers' code for tax avoidance with great fanfare, claiming that he was forcing banks to pay their fair share. Yet on the same day Goldman Sachs were threatening to withdraw from the code if HMRC forced them to pay the tax they owed.

"HMRC waived millions of pounds owed by Goldman Sachs against legal advice and HMRC's own guidelines to salvage Dave Hartnett's personal reputation and George Osborne's veneer of tough tax talk," he said.

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. HMRC have tried tirelessly to cover up this deal. They have stonewalled the public accounts committee, whitewashed the NAO report, criminalised a whistleblower and have fought this legal case every step of the way.

"In the runup to the G8, where David Cameron and George Osborne will pronounce themselves as global leaders in tackling tax avoidance, this case shows what is going on behind closed doors and the headline-grabbing announcements tax avoidance as usual, sweetheart deals to avoid red faces of ministers and giving in to threats from big business."

UK Uncut Legal Action is seeking a ruling that the deal reached between Goldman Sachs and HMRC was unlawful because it was in direct contradiction of HMRC's own statutory duty to collect tax properly, and its own guidance.

Simler said HMRC reached a settlement in a dispute over national insurance due on bonuses with Goldman Sachs in 2010 without requiring the payment of interest. The potential cost to the taxpayer is officially put at £8m but a whistleblower, Osita Mba, said the sum could be as high as £20m.

The bank was allowed to skip the interest bill after Hartnett was wrongly advised there was a "legal impediment" to collecting it, said Simler. The error was quickly noticed, but, despite legal advice that the agreement with the bank was not binding, HMRC unlawfully withdrew a county court claim for what was owed without seeking to renegotiate, she said.

This went against HMRC guidelines stating that taxpayers should be treated equally and no discounts or deals should be done. Simler said: "The issues in this case are of great importance both to taxpayers and HMRC as well."

The case continues.