HMRC (Company Liquidations)

Robert Neill Excerpts

Friday 17th January 2014 Commons Chamber

[Robert Neill (Bromley and Chislehurst) (Con)]

I am grateful for the opportunity to introduce this debate on the behaviour of Her Majesty’s Revenue and Customs in relation to company liquidations. HMRC has cynically abused the system, which is a disgrace to any public Department. HMRC’s behaviour also indicates serious flaws in policy, which I hope Ministers will address.

I am conscious of the fact that HMRC is operationally independent of Ministers, so my fire is not directed at my hon. Friend the Exchequer Secretary; my fire is directed at HMRC officials. There are concerns about individual injustice and about the operation of policy and governance within HMRC, which I submit are found to be woefully lacking on these matters. The concerns stem from an understandable change of policy through which HMRC has, over a number of years, used civil proceedings to pursue allegations of evasion of duty against individuals and corporate bodies. The proceedings frequently involve allegations of fraud that are thought to be more advantageous to pursue through the civil courts, where of course the burden of proof is lower—the balance of probabilities—than for proceedings in the criminal courts, where the Revenue would have to prove the matter to the criminal standard. Dealt with proportionately and properly, I can see that that is a legitimate tool in the box for protecting public revenue. The difficulty is that if it is not used proportionately and properly we do not get the real offenders. That was precisely what happened in the case of a company run by constituents of mine, of my hon. Friend the Member for Old Bexley and Sidcup (James Brokenshire), who is in the Chamber today, and of my right hon. Friend the Member for Chingford and Woodford Green (Mr Duncan Smith). I shall refer to a particular case, but there are general principles too. I am conscious that there are still some matters of litigation, but I do not think I will be trespassing on any of them in what I say about the history.

The case concerns a company called Abbey Forwarding Ltd, a reputable and established bonded warehouse operation that operated in east London from 1971 until 2009. It employed 23 people. The directors were constituents of mine and my right hon. and hon. Friends. In February 2009, Her Majesty’s Revenue and Customs raised assessments against the company for a sum of just short of £6 million, alleging that excise duty had been evaded on the importation of alcohol. They went to an ex parte hearing and successfully applied to have the company placed in provisional liquidation on the basis that there had been participation in what was alleged to be a diversion fraud.

The court appointed Louise Brittain, a senior partner at Deloitte, as the liquidator. She apparently had a great deal of experience in the field, which might be surprising in the light of what comes later, and had been appointed in a number of other liquidations in which the Revenue had been involved. Of course, the Revenue says, “It wasn’t us but the court,” but we know that that is a play on words. The appointment was made and she immediately brought proceedings against the directors for breach of fiduciary duty, alleging fraud.

When that had been done the business was shut down with no forewarning, the staff were sacked and the business was effectively run down. The Abbey directors were not present at the ex parte hearing and as they had been dismissed as employees of the company they had no recourse to appeal against the allegations or the assessments, which they have contested from the very beginning. The liquidator, with the connivance of the Revenue, I would say, deliberately sought to shut them out from pursuing any avenue of appeal against those assessments.

It seems to me that the liquidator showed a remarkable lack of interest in pursuing the interests of the company or the creditors, and to that end she embarked on a fire sale of the company’s remaining assets to the extent that vehicles worth £38,000 were sold for £2,000 and alcohol stock worth £30,000 for £1,000. There was intimidating behaviour towards the directors and their families as friends and acquaintances were rung up, including on ex-directory phone numbers, and asked whether they were owed money.

That was all being done in a litigious war of attrition against the directors, funded in effect by the taxpayer as HMRC gave the liquidator indemnity from her legal costs and any damages that might be awarded against her should the directors be successful. That seems to me to be a very questionable use of public money.

Civil proceedings were used to pursue what might have been criminal matters, and two matters of concern arose. The first is the extraordinary conduct of the liquidator, as I have discussed already, and the second is the cynical conduct of HMRC in hiding behind the liquidator when things went wrong. That is exactly what it did. It might be legitimate to use such a device to deal with fraudsters, but my constituents were not fraudsters and were found not to be by the courts. Great care must be taken with the governance of this procedure, as HMRC can end up as judge, jury and executioner.

In this case, the claim was brought in due course on 30 July 2010, nearly a year or so later, before Mr Justice Lewison—now, I think, Lord Justice Lewison—in the High Court. The judge in the High Court dismissed the claims against the former directors in their entirety and said—one might have hoped that this would have sunken in with the Revenue, but it clearly did not—that the liquidator’s case had “crumbled to dust”. That is a very striking phrase. The case was not just thrown out on a technicality; it fell apart at the seams.

The allegation had been that there were 301 transactions amounting to a diversion. It became apparent that there had only ever been evidence of three potential diversions—interceptions, as they were called. As the judge observed, it was an exaggeration of a hundredfold. Even more extraordinarily, it became apparent in subsequent proceedings that the liquidator, Ms Brittain, had been aware of that throughout the 12-day trail, during which she gave evidence under oath, but at no point did she seek to correct the misleading information, despite signing a statement—it had a certification of truth on it—that included the inaccurate figure. She was thoroughly criticised by the judge, and rightly so. She consequently left Deloitte and no longer practises independently without supervision. Frankly, she should never be appointed as a liquidator again, because that ineptitude led to serious injustice for my constituents.

Unfortunately, rather than recognising that harm had been done and seeking to rectify it, HMRC sought simply, and disingenuously, to distance itself from the matter, saying, “All that was conducted by the liquidator. We had no more involvement once she had been appointed.” That is betrayed by the facts, even though the assertion is misleadingly contained in a letter sent to my hon. Friend the Member for Old Bexley and Sidcup and myself by Jennie Granger, HMRC’s operations director.

In fact, all the evidence that the liquidator relied upon, including the false allegation of 301 interceptions, came from witness statements provided by HMRC officers. HMRC officers and their representatives attended every single court hearing, and they were in regular correspondence with the liquidator throughout. E-mails that have come into my constituents’ possession indicate a social relationship between some of those officers and the liquidator, which some of us would raise an eyebrow about in a professional context. Against that background, it seems to me that Ms Granger—I do not doubt that she signed the letter in good faith—was seriously misinformed. I hope that my hon. Friend the Minister will ensure that HMRC’s management looks seriously at the conduct of the officials involved.

The situation has now progressed to a stage where all that remains—I will not talk about this, because litigation is ongoing—is a ruination claim brought by the directors against HMRC. Tens of thousands of pounds—the total cost is disputed—have already been awarded, either against HMRC or the liquidator that HMRC is identifying. In other words, the money has come from the public purse.

Some 30 years’ work of my constituents has been destroyed, their workers have lost their livelihoods, and to this day HMRC has sought—happily, unsuccessfully—to obstruct their obtaining a new licence to operate a fresh business and rebuild their lives. A disgraceful vendetta has been carried out against them. It does a public body no good to try then to pretend that that did not happen. I am sorry that my hon. Friend the Minister has to respond to a debate that must be cast in those terms, but my worry is this: what is a legitimate tool to be used that can be discredited if it is not used properly?

There has been a failure ever since this began, which was nearly two years ago, despite a detailed request from my hon. Friend the Member for Old Bexley and Sidcup, supported by me, for the internal report on what happened in the investigation to be published. I hope that my hon. Friend the Minister will ensure that it will be made available. I hope that he will recognise that simply hiding behind the ongoing ruination litigation will lead only to the suspicion that it is a further attempt at delay and backside-covering, to put it bluntly, by those responsible in HMRC. This is not a case of there being a reasonable judgment and things going wrong in the course of litigation; the evidence clearly never justified the allegations made. If that was the case, one hopes that HMRC would say, in a constructive spirit, “We will carry out a full review, and we will be transparent about it and share the results with those who have been wronged as a consequence. We will apologise and ensure that appropriate arrangements for redress, such as there can be, are made.”

None of that has been forthcoming within, disturbingly, a culture of an unwillingness to engage realistically not only with the directors of the company but with their Members of Parliament. That does no credit to those involved. For the sake of those of us who do not wish the reputation of a public agency such as HMRC to be damaged, I hope that the management of HMRC—who are listening, I trust—will take serious action. Although the Minister does not have operational control, I hope that he will not only do what he can to facilitate ensuring that appropriate meetings take place with my hon. Friends and I, and others, to try to seek a resolution that does not needlessly cost the taxpayer any more money, but give us more detail on the changes in governance arrangements that I am told have taken place within HMRC since this case started.

I would like to say that this is an isolated instance, but I am afraid that other hon. Members have given me examples of a number of other instances where this tool—the use of liquidation to pursue claims—has been used and has been found wanting. Another well-reported case in 2013 led to another High Court judge seriously criticising the way in which HMRC had operated through this procedure. That suggests that problems still arise despite the changes in governance about which we were assured in the letter from Ms Granger.

The only way to reassure people that this will not happen in future is to be up-front about what happened, to make the report available, to make available to everybody the information about the changes in governance, and to instigate the fullest possible review to make sure that the vast majority of honourable and hard-working employees of HMRC do not have their reputations damaged by something that clearly went wrong and that, at the very least, demonstrates a high degree of incompetence. Even worse, it demonstrates a degree of complacency on the part of the senior management of HMRC. It is almost as though they said, “We will not admit that we were wrong. We have deeper pockets than they do. We will put them out of business, in effect, and hope that they go away.” That is what was happening, and they were doing it through the use of public money. That is not a proper and fair means of protecting public revenue.

Against that background, I hope that the Minister will insist that this is investigated within HMRC at the highest possible level. Although he does not have day-to-day operational responsibility, I hope that he will have passed to him the details of what happens, make sure that the details of any review are shared with my constituents and others, and make sure that my hon. Friend the Member for Old Bexley and Sidcup and I are given full details about the changes in governance arrangements so that we can be satisfied that the lessons that have been learned are genuinely acted on. I also hope that the Minister will prevail on those responsible to say that if an error has been made, the best thing to do is to recognise that lessons have been learned, apologise, and move on. None of that has happened so far.

As regards those who have been wronged, there should be a resolution of the claims they are seeking to make. I am not asking for anything as regards what those claims should be, because that is not appropriate in these circumstances. However, there should be a recognition that there needs to be some redress where it is clearly demonstrated that injustice has occurred. The High Court judge said that, prima facie, there was a strong case for injustice having been done to my constituents—and, ultimately, HMRC did not appeal his decision.

I hope that the Minister will take on board the fact that I do not raise this issue lightly or with any pleasure, but in the interests of the reputation of the public service, it needs to be addressed with more vigour than it has been so far.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

I thank my hon. Friend the Member for Bromley and Chislehurst (Robert Neill) for securing a debate on this matter, which he has raised with me and with HMRC on a number of occasions in the past few years. As he pointed out, I can say the same for my right hon. Friend the Member for Chingford and Woodford Green (Mr Duncan Smith) and my hon. Friend the Member for Old Bexley and Sidcup (James Brokenshire), who is here today.

My hon. Friend made his case very powerfully in his capacity as a constituency MP. He also, in many respects, brought to bear on these matters his considerable experience as a barrister, and a criminal barrister at that. He rightly said that I am constrained by the principle of taxpayer confidentiality and the fact that Ministers and politicians do not interfere in operational matters; there is good reason why that is the case. I hope my hon. Friend will forgive me if I am not able to delve too deeply into this particular matter, given the principle of taxpayer confidentiality, although I will say what I can.

I can, however, discuss the use of provisional liquidations, which my hon. Friend has highlighted, and I hope it will be helpful if I do so. Liquidation is a court-driven process that takes time. It can take several weeks after the presentation of a winding-up petition for a liquidator finally to be appointed. Where the company is being controlled by fraudulent individuals, that delay can provide a perfect opportunity for them to destroy the evidence of their fraud and move assets out of the company. In such cases, any creditor, including Her Majesty’s Revenue and Customs, may petition the court for provisional liquidation. This allows the winding-up petition to be presented without any notice to the company. If the court is persuaded of both the company’s insolvency and the potential for fraud, it will appoint a liquidator to take immediate control of the company, its assets and its records. This protects creditors’ interests. The company directors will have a chance shortly afterwards to argue that the company is not insolvent and so should not be wound up. If they succeed, the provisional liquidator is removed. Where there is clear evidence that a company is perpetrating significant tax or duty fraud, HMRC will apply to the court for an order that the company be placed into provisional liquidation, to stop the fraud and recover assets.

Provisional liquidation orders can be made only by the court and HMRC applies to the court only in the most serious of cases, such as alcohol diversion fraud, whereby alcohol is purported to be exported lawfully without payment of duty or VAT to another European Union country but is then diverted unlawfully for consumption in the UK without payment of duty or VAT. The cost to the Exchequer of this type of fraud is estimated to be more than £1 billion. Provisional liquidation action stops the fraud continuing, because trade ceases, and allows assets to be recovered. It has also been used in cases of VAT missing trader fraud and ongoing pay-as-you-earn and national insurance fraud in the construction industry.

Provisional liquidation is an exceptional action and it is worth highlighting one or two statistics. In 2009, five provisional liquidations were instituted by HMRC. In 2010, there were just two cases and in 2011 there were four, while 2012 and 2013 had just one case each. In total since 2009, there have been only 13 applications to put companies into provisional liquidation, although in some of the cases, associated companies were liquidated simultaneously. In not one of those cases has any company successfully argued before the court that the provisional liquidation order should not have been made. Although my hon. Friend has raised concerns in this regard, I could, if I were so inclined, quote judges stating that HMRC’s behaviour in respect of bringing a provisional liquidation was entirely reasonable and well-evidenced.

It can take a long time to bring cases to a conclusion, but I am informed by HMRC that it considers that the 13 actions have prevented Exchequer loss of at least £150 million. I would not therefore wish HMRC to restrict its use of provisional liquidations in appropriate circumstances.

Before a case gets to court, HMRC has rigorous internal processes, which include the involvement throughout of an independent governance team that is separate from the case team. The specialist team challenges and considers the available evidence and strategy. It is made up of externally qualified insolvency specialists with a great deal of experience of insolvency matters. During the whole process, legal advice is provided by HRMC internal solicitors and, where appropriate, additional external insolvency specialist solicitors, and the final sign-off is at senior level. I hope that I have given a degree of reassurance about the general use of provisional liquidations.

Returning to the case that my hon. Friends have raised with me on several occasions, I will deal with the specific issue of the internal report referred to by my hon. Friend the Member for Bromley and Chislehurst. He is absolutely right that HMRC promised an internal review of the case. The review will be conducted by people separate from the operations directorate, and they will report to the HMRC commissioners. The litigation is still ongoing, as my hon. Friend has mentioned, so HMRC’s position is that it would be appropriate for the review to consider the entirety of the issue and to take into account the conclusion of the outstanding litigation. HMRC will consequently be able to respond not only on the litigation and court hearings that have already occurred, but on the one last outstanding piece of litigation. It therefore wants to undertake the review only once that point has been reached.

[Robert Neill]

Will the Minister help me on this point? In correspondence with my hon. Friend the Member for Old Bexley and Sidcup, HMRC indicated that the review had been commenced, but not concluded. My concern is that some factual matters that must be the subject of the review go back to the very early stages of the process, when assessments were raised in February 2009 or not long thereafter. One would obviously hope that investigations into those matters had taken place already, while the evidence was still fresh in people’s minds, rather than that they should be reviewed five years or so later. Will the Minister reassure me that work has already started on the review? If he cannot do so today, will he write to my hon. Friends and me about the progress, if not the conclusion, of the review?

[Mr Gauke]

The best thing that I can do is to take up his invitation to write to him to set out the exact status of the review, the evidence that needs to be assessed and the progress that has been made.

Notwithstanding the outstanding litigation on this matter, may I say to my hon. Friend that I am more than happy to facilitate a meeting of whatever type is appropriate so that his concerns can be raised at this stage? As I am sure was his intention, he has put his thoughts and concerns on the record very clearly and powerfully, and I know that HMRC will look at his every word with great care and attention. As I have said, there is a limit to how much I can say about such an operational matter, but I am grateful to my hon. Friend for raising the case. Let me assure him that his concerns will be taken most seriously.

Question put and agreed to.