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Hand shake
HMRC's David Hartnett shook hands with Goldman Sachs over a tax deal that reduced the bank's liability by £10m (Reuters)

When former HMRC permanent secretary David Hartnett shook hands with a Goldman Sachs tax executive in a so-called "sweetheart deal", both men in the room must have thought that was it.

The deal ended up reducing the Vampire Squid's unpaid tax bill in the UK by around £10m (€11.8m, $15.6m).

Now HMRC is being dragged in front of a high court judge to fend off a legal challenge over the secretive 2011 deal.

Sketchy details only emerged because Osita Mba, a whistleblowing solicitor in the tax agency, leaked a document about the HMRC-Goldman love-in.

Anti-tax avoidance campaigners UK Uncut hired human rights law firm Leigh Day to bring a case against HMRC over this tax let-off and others - and their first day in court is 2 May.

"We have advised our clients that the deal reached between HMRC and Goldman Sachs was unlawful - it was in direct contradiction to HMRC's duty to collect taxes and to do so properly, fairly and equally," said Rosa Curling, a Leigh Day lawyer working on the case.

"Goldman Sachs is one of the richest banks in the world. The coalition government has stated on several occasions that it is committed to ensuring companies cannot avoid paying the taxes they owe.

"Despite this, the government has chosen to oppose our client's claim. UK Uncut Legal Action has therefore had no option but to ask the court to intervene so it can ensure a clear message is sent to all - that the tax rules apply to all corporations in the same way, however rich and powerful they may be."

Rosie Rogers, a spokeswoman for UK Uncut, told IBTimes UK that the case intends to "question the entire way HMRC and government interacts with big businesses".

"Especially in light of the G8 coming up, with George Osborne and David Cameron saying they are going to be leading the world stage on tax avoidance," she said.

"They are saying outwardly that they are getting tough on tax avoidance and clamping down when secretly, behind closed doors, they are letting companies off millions and billions."

A diplomatic HMRC prefers to reach mutual agreements with tax avoiders, rather than battle through the courts to claw back every last penny, seemingly as part of a philosophy that it is better to collect some money, at least, than to splash out on lawyers.

Tax avoidance is a potent subject.

As the government cuts back public spending and lifeblood public services are drained away from local communities, tax-shy companies are being told to put their wallets away by HMRC, which cheekily picks up the tab on taxpayers' behalf.

Money failing to find its way into HMRC could be used to support these services, or underpin incomes as welfare bills are slashed, household bills rise, and real pay falls to similar levels a decade ago.

"We are in a time of deep economic austerity, when peoples' lives are being ruined by the cuts, and yet big companies are getting away with sweetheart deals," Rogers said.

"So really we are questioning the whole culture, ethos, and ideology behind that.

"HMRC are going after cleaners who owe tax of £20 they haven't paid yet these big corporations get off billions."

Goldman and the Virgin Islands

The case stems from a tax avoidance scheme known as an employment benefit trust (EBT). The scheme relied on offshore units through which staff could be paid. The 21 banks using EBTs could then dodge paying the employer national insurance contribution on their staff's juicy bonuses.

After years of investigation by HMRC, the courts ruled in 2005 that EBTs were unlawful tax schemes.

All of the banks involved in EBTs coughed up the cash they owed from unlawful avoidance.

Not Goldman, though.

It stubbornly refused to pay the £40m it owed by 2011, when an additional £10m of interest had accrued on the outstanding tax bill.

Goldman Sachs' particular EBT was operated through Virgin Islands-based Goldman Sachs Services Ltd. In 2010, a judge was unconvinced that, as Goldman claimed, its shell business on the Virgin Islands was the real employer of its London staff being paid through the scheme. Goldman's appeal was thrown out.

Leaked minutes from a November 2010 meeting between HMRC's Hartnett and Goldman's tax director Mike Housden, published by the Guardian, exposed that the pair had "shaken hands" on a cosy £30m deal to settle the dispute - £10m less than was owed.

Hartnett was accused of lying about his dealings with Goldman by parliament's Public Accounts Committee (PAC). He had told a separate committee of lawmakers that he did not handle Goldman's tax affairs.

When the PAC challenged him on this, Hartnett insisted that he "did not lie".

"I did not deal with Goldman Sachs' tax affairs in the normal sense," he replied, before Margaret Hodge, PAC chairwoman, labelled him "laughable".

NAO's 'Nothing of Substance' Inquiry

A judge-led probe, set up by the National Audit Office, into the sweetheart deals between HMRC and corporate tax avoiders, such as Vodafone which has also come to convenient agreements with the government's tax office.

UK Uncut says the inquiry was fatally undermined.

Amyas Morse, who was head of the NAO, had told Hartnett ahead of the report that it would find "nothing of substance" in its conclusions. The inquiry found the Goldman's golden hand shake with HMRC, and other similar deals, to be "reasonable".

"It is completely ridiculous," said Rogers, claiming it was "just a PR process".

More leaked documents to the Guardian exposed a number that HMRC was trying to keep hidden from the public, insisting it waS bound to secrecy by "taxpayer confidentiality".

These deals brought in £4.5bn of tax to the Treasury, and agreements worth £1bn are "not uncommon". It leaves the question, as PAC chairwoman Hodge highlighted, just how much is the Treasury losing out on?

"Whilst it is in the interest of the government to collect monies, these are huge sums. If there were deals involved, we need to know that the companies paid a fair amount on the profits they made from their businesses in the UK," Hodge told the Guardian.

In the summer of 2012, 60-year-old Hartnett warmed the cockles of taxpayers' hearts by retiring to a £1.7m pension pot. That same summer, UK Uncut was granted permission by high court judges to mount a case against HMRC.

The Outcome

There is no chance of HMRC vanquishing its sweetheart deals of the past. The high court has already said that the tax agency cannot act retroactively and chase payments it waived.

"It's not about quashing the decisions, it's about having a ruling that it was unlawful," said Rogers.

The judge's ruling, which is not expected for a few weeks, will give HMRC clarity over the legality of future handshakes. It will set a benchmark on what is and what is not legal in HMRC's pursuit of tax payments.

Whatever the outcome, UK Uncut's legal challenge has kept the focus on sweetheart deals and tax avoidance. It has made HMRC uncomfortable. There may be more discomfort in the future.

"We don't know what happens behind closed doors. This case is just scratching the surface of what's happening," said Rogers.

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