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Saville Products Ltd and HMRC

Volume 565: debated on Tuesday 2 July 2013

I am grateful for the opportunity to have this short debate in Westminster Hall. I am pleased to serve under your chairmanship, Mr Crausby, and am delighted to see the Exchequer Secretary in his place to reply. He has been unfailingly courteous and helpful in dealing with this case, as is his usual practice. He finds himself in his current ministerial position towards the end of what has been a 12-year process, and will therefore respond to a debate about events for which, mostly, he carries no responsibility.

The debate concerns the case of my constituents, Mr and Mrs Nelson. They are an impressive entrepreneurial and professional couple who took over a business in Ashton-under-Lyne some 15 years ago and who, for much of the past 12 years, have been forced to endure an oppressive investigation by Her Majesty’s Revenue and Customs. They have had to fight against an unjustified tax charge and to struggle ultimately for proper redress and compensation. As so much attention is now paid to big corporations and the efforts they sometimes make to reduce their tax bills, it is particularly timely to consider the injustice that has been faced by the Nelsons and their small to medium-sized engineering company, Saville Products Ltd. As I have said, the company is located in the Ashton-under-Lyne constituency, and I place on record my constituents’ gratitude—and mine—for the unstinting support of the hon. Member for Ashton-under-Lyne (David Heyes), and of their Trafford ward councillor, John Lamb.

The story begins in 2001, with an investigation into my constituents’ business, and then personal, tax affairs, which went on for five years and ended only when the Nelsons sought the personal intervention of David Hartnett, the then chief executive of HMRC. It might help if I gave a brief summary of the case, and the difficulties that Mr and Mrs Nelson have faced over the years, in the words of Mr Nelson himself, who wrote to me for that purpose:

“HMRC demanded information within an unreasonable timescale with the threat of penalties. In order to comply, we had to spend an inordinate amount of time, under pressure, to the direct detriment of the company. HMRC threatened us with penalties to try to bully us into paying tax we knew we did not owe. HMRC have since admitted this. HMRC deceived us by asking us to settle an amount we did not owe in order to bring the investigation to an end. They failed to inform us, and we only found out later from the company’s accountant, that had we agreed to their demands they would have applied that sum to tax bills issued for each of the six previous years and 2 years into the future. This would have bankrupted the company.”

According to Mr Nelson, the HMRC investigator’s

“attitude towards us was vindictive and we believed he was waging a vendetta against us because we had the temerity to stand up to his bullying tactics. We refused to sign inaccurate meeting notes on two occasions…The inspector…made a telephone call to the company’s accountant at 8.00 am one morning, slandering and discrediting me and trying to elicit information to which he was not entitled.”

Mr Nelson’s report goes on the state that HMRC

“inisted that the Nelsons had to provide information about the disposal of two cars they had sold, one of which had belonged to one of their daughters. It transpired from the Ombudsman’s report that this information was already in the possession of”

the inspector,

“and that he neither told us he was seeking the information nor informed us when he had obtained it. Private information about Mrs Nelson’s mother’s financial affairs was demanded by HMRC, causing distress to the family, when this information was not relevant or connected to the enquiry. Notes of a meeting between the Nelsons and the HMRC’s Area Director…were deliberately doctored to try to justify false accusations. We have the original notes as evidence…the HMRC Complaints Department promised to hold a meeting with us and then withdrew the offer…HMRC made us recreate all our personal records which had been lost at the Manchester tax office”

while in the possession of Revenue and Customs. The report states:

“This was an entire year’s personal financial information in minute detail and took us hundreds of hours but the Ombudsman’s report stated that HMRC had the powers to obtain this information themselves.”

Nevertheless, HMRC chose to demand it of my constituents.

Mr Nelson’s account continues:

“HMRC opened an investigation into our personal financial affairs without establishing that there was anything wrong in the company’s records”.

HMRC gave

“the wrong information on expenses claims and subsequently denied having done so even though there was documentary evidence to prove”

that that was the case. There was subsequently an apology for that action. Then,

“HMRC opened an investigation into another year (2003) and demanded a statement of affairs”

from the Nelsons, when there was still no justification

“for believing that there was anything wrong in the year already under investigation (2000). HMRC sent a barrage of 23 assessments shortly before Christmas in 2004, without justification”.

One has to assume that that was designed to cause worry and alarm. The Nelsons believed that the company would have been bankrupted had the demands been paid. HMRC claimed that it was the Nelsons’ choice

“to prolong the investigation by answering…questions ourselves but this was disingenuous as the company could not have afforded their fees and they had no knowledge of our personal tax affairs.”

The threat of a potential £70,000 tax bill in 2005 meant that Saville Products Ltd lost the opportunity to acquire its major competitor, Autogem, at what would have been a very attractive price.

“HMRC’s maladministration not only affected Saville’s business during 2001-6 because of the amount of time they had to devote to the investigation but also meant that we lost the chance to create a combined company that would have been worth £10 million. Incompetence and poor service from HMRC staff has resulted in major economic loss because we had to sort out the consequences. One example is that the inspector did not understand the Sage accounting system and therefore claimed that we had not put through hundreds of invoices (these were merely carriage costs, separately coded). Another example was the failure to understand the stock valuation.”

The Nelsons were accused of diverting takings, which they understood to be a criminal offence, and they felt that they were held to be guilty until proved innocent. They also reported that

“a cavalier attitude to our personal and company documents, even from Mr Hartnett, endangered our company’s security and reputation. Documents were sent to third parties, not marked private, sent through post and not properly parcelled.”

Throughout the process, an unpleasant and oppressive attitude was taken towards a small business and the family who owned and ran it, who were trying to make it into a successful company and employer. That is borne out by the Nelson’s accountants, who have stated that what happened had a significant effect on the business. Mr Speakman, a partner at Beever and Struthers accountants, wrote to the Parliamentary and Health Service Ombudsman in May 2009:

“What I can state categorically is that whilst the negotiations to purchase Autogem were going on, HMRC dismissed the appeal made by the Nelsons via the Regional Complaints Office and continued to make unreasonable demands on their time. Mr and Mrs Nelson told me that they could not risk proceeding with the purchase of Autogem whilst they had the uncertainty of a potentially ruinous tax bill hanging over them…The frustration of having to contend with HMRC’s repeated failure to look after their personal documents, the fact that they were never believed and that the onus of proof was always on them with the assumption of guilt rather than innocence, the threatening tactics when HMRC bombarded them with tax assessments and demands going back six years and forward two, all these aspects have had a devastating effect on Mr and Mrs Nelson. They are resilient characters but I know they have both suffered stress and disillusion as a result of this investigation.”

Mr Speakman went on to estimate the financial loss that the Nelsons have suffered as a result of the investigation at £2.5 million. From details that I do not have time to go into, that might be a conservative estimate.

In response to the Nelsons’ concerns and finding their complaints largely proved, the ombudsman recommended a significant—by the ombudsman’s standards —payment from HMRC in 2009. In a letter on 25 September 2009, Lesley Strathie, the then chief executive of HMRC, wrote:

“I fully accept that we handled the enquiry badly in a number of key respects. In particular, we failed to apply a proper level of management control which should have ensured that the investigation was concluded much sooner and I understand what an adverse impact this has had on your business and on you…personally.”

Beever and Struthers estimated the scale of that economic loss under the various heads of loss of income, loss in capital value, perpetuating loss of profits and loss of opportunity.

The ombudsman’s decision in 2009 stated:

“Overall, I uphold a significant part of Mr and Mrs Nelson’s complaint. Whilst I am not persuaded (despite Mr and Mrs Nelson’s strong claims to the contrary) that the objective evidence is sufficient for me to find that individual HMRC officers have been dishonest, I am satisfied that there have been significant specific flaws in HMRC’s handling of their enquiry into SF Ltd”

—Saville Fasteners Ltd. She continued:

“More importantly, however, I consider that HMRC’s management of the enquiry was seriously deficient, with little, or insufficient, regard being paid to the compliance cost of the enquiry or to proportionality. I uphold the aspect of Mr and Mrs Nelson’s complaint that HMRC’s internal complaints procedure failed them… I am satisfied that, if the enquiry had been conducted without flaw, it would have concluded very much sooner than it did. I consider that the unreasonable continuance of the enquiry amounted to serious maladministration which has caused Mr and Mrs Nelson significant distress and inconvenience, and diverted their attention away from their business at a critical time. However, I am not persuaded that the very substantial claim Mr and Mrs Nelson have made for economic loss has been made out.”

In response to further correspondence, the ombudsman wrote to the Nelsons in November 2010, stating that one point is

“that any estimate of economic loss based on a departure from a forward projection can only be speculative and a matter of opinion, rather than demonstrable fact. I agree. We can only make recommendations for compensation for financial loss on the basis of firm evidence, and not on the basis of speculation…I therefore consider that we were right to conclude that there was too great a level of uncertainty and contingency to recommend that HMRC compensate you for a specific amount of economic loss.

The alternative was for my Office to recommend what is called a consolatory payment in recognition that the way in which HMRC conducted the enquiry must have diverted your attention from running your business to a significant extent, and caused you considerable inconvenience and distress.”

Consolatory payments by Departments are generally modest and those by HMRC of more than £1,000 are comparatively unusual, so the fact that the ombudsman recommended a payment of £30,000 shows the scale of the wrongdoing and maladministration that she felt she had encountered. However, her terms of reference and her remit did not allow her to venture into realm of compensation for the specific economic loss.

Last September, the Minister kindly agreed to meet Mr and Mrs Nelson and me. Following that meeting, Mr Nelson wrote to me saying that, in 2006, Lesley Strathie

“wrote to us to acknowledge that we should be compensated for economic loss, yet more than 11 years after this pernicious investigation began we have still not been adequately compensated. Mr Hartnett himself told us that HMRC would pay whatever the Ombudsman instructed them to pay yet he knew full well that the Ombudsman did not have the authority to make an award for economic loss.”

He also drew attention to the fact that one of the officials at the meeting, Mr Norris, stated that HMRC would normally consider paying the cost of accountancy fees incurred in an investigation but, as Mr Nelson pointed out, when we obtained the minutes of that meeting at the Treasury, there was no reference to such a statement.

None the less, Mr Nelson obtained from Mr Speakman at Beever and Struthers an estimate of the cost in professional fees of the 3,000 hours that these small-business people were forced to devote to the defence of their business and reputation. A far lower figure than the £2.5 million for the estimated economic loss, which I have already mentioned, the estimated cost of what the professional fees would have been to mount the defence in the case is £279,000. In fact, the case was defended by Mr Nelson and his wife. Mr Nelson, who is a chartered accountant and had been a senior manager in a merchant bank, was well qualified to do that, but he had to devote a great deal of time to it.

In this brief debate, I have sought to highlight the plight of one SME, Saville Products Ltd, and its proprietors, at the hands of an oppressive and unjustified investigation into their tax affairs. The case has attracted sympathy from the Chair of the Treasury Committee, my hon. Friend the Member for Chichester (Mr Tyrie), the Chair of the Public Accounts Committee, the right hon. Member for Barking (Margaret Hodge), and the Chair of the Public Administration Committee, my hon. Friend the Member for Harwich and North Essex (Mr Jenkin), in relation to the ombudsman’s powers. Mr Michael Izza, the chief executive of the Institute of Chartered Accountants in England and Wales, has raised concerns about it. The case has drawn an apology from HMRC and a damning report from the ombudsman.

Compensation of £20,000, plus accounting costs of £2,500, was increased by the ombudsman by 50% in recognition of the personal toll on my constituents, but at no point has the financial damage to the company been compensated. The company’s accountants have estimated that compensation at £2.5 million, which is probably a conservative estimate. Following our meeting at the Treasury, the company has instead looked for the cost in professional fees that would have been incurred.

In 16 years in the House, I have never brought the plight of a local business to the Floor in this way. I have done so because I regard the case as a manifest injustice—an unpleasant spectacle of a Department of State treating a small business with disdain. I hope that the Minister will reconsider the case for the sake of my constituents and their business and for the sake of other small and medium-sized businesses facing similar mistreatment.

A failure by HMRC to conduct a proper inquiry has been proved, a failure of HMRC’s internal complaints procedure has been proved, and a finding of enormous distress to my constituents has been proved. We have seen an SME that cannot afford to take the Goliath of HMRC to court and an ombudsman that does not have the power to make good economic loss. We rely on the Minister to reconsider the case.

It is a great pleasure to serve under your chairmanship again, Mr Crausby. I am grateful to have the opportunity to respond to the speech made by my hon. Friend the Member for Altrincham and Sale West (Mr Brady) who, as ever, represented his constituents with great eloquence and made a good case on their behalf.

I should state that in the case raised by my hon. Friend, Her Majesty’s Revenue and Customs—or the Inland Revenue, which was the relevant organisation for much of the time—clearly did not carry out its investigation appropriately and did not complete its review process to the standards expected. I am aware, both from his comments today and from the previous meeting to which he referred, of the distress and worry that his constituents have suffered as a consequence, and I offer my sincere sympathies and apologies for their experiences during that period.

I feel that it would be of most use to address two issues in the course of the debate. First, I shall set out the procedures in place to ensure that all taxpayers, such as my hon. Friend’s constituents, can receive a fair and independent review of any grievance. Secondly, I will address the issues that he has specifically raised involving Mr and Mrs Nelson.

On the first point, I should start by stating that employees of HMRC clearly must understand fully that compliance checks can be stressful to taxpayers. To be fair to HMRC, it sets high standards for professionalism and customer service, and deals with the vast majority of cases fairly and efficiently. With more than 500,000 compliance checks undertaken annually, there are likely to be some cases when claimants feel that those standards have not been met. In such circumstances, it is absolutely right that taxpayers, or their agents, can submit a complaint about the action of HMRC.

HMRC has a well-established two-tier complaints process for such situations and makes a concerted effort to resolve all complaints at the first opportunity. That involves a fully trained and experienced case handler who undertakes a full review of all aspects of the complaint. If the customer remains unhappy following that process, they can ask for the complaint to be looked at again. This second-tier—or tier 2—review is carried out by a different case handler to help to provide an independent perspective on the case. Again, it is worth noting that the vast majority of cases are resolved over the first two tiers. In the tax year 2011-12, HMRC successfully resolved 98% of complaints over the two tiers.

In cases when the taxpayer remains dissatisfied with the response, such as in the case involving Mr and Mrs Nelson, it is right that they can ask the adjudicator or the Parliamentary and Health Service Ombudsman to look into their complaint. The adjudicator is a fair and unbiased referee, and the service provided is free to the taxpayer, provided that the complaint falls within the adjudicator’s remit.

The adjudicator’s role is to investigate and help to resolve complaints from individuals and businesses that remain unhappy about how HMRC, the Valuation Office Agency or the Insolvency Service have handled their affairs, after they have exhausted the relevant organisation’s complaints handling procedure. That can include complaints about mistakes, delays, poor advice, inappropriate staff behaviour or the use of discretion.

As my hon. Friend is aware, a customer can also ask their Member of Parliament to refer the complaint to the Parliamentary and Health Service Ombudsman. The ombudsman is independent of the Government and investigates complaints impartially, specifically on allegations of complicity or malpractice. Investigations by the ombudsman are conducted in private, and the relevant legislation restricts her ability to provide detailed information about specific investigations.

I can confirm that if the ombudsman decides that a Department or an arm’s length body has made a mistake, she will work with it to correct that error. That could involve acknowledging the mistake, issuing an apology and paying compensation. In all cases, it should involve ensuring that the same mistake does not happen again.

That leads me to the second part of my response: my hon. Friend’s interest in the specific case of his constituents. As I mentioned at the outset, it is clear to me, having taken a personal interest in the case, that significant mistakes were made by HMRC and its predecessor organisation. The original investigation was not handled well, and that was further compounded by the failure of HMRC complaints handlers to acknowledge that.

In the case of all complaints that are referred to either the adjudicator or the ombudsman and that are upheld, HMRC undertakes a thorough internal review and, as would be expected, steps are taken to ensure that lessons are learned by not just the individuals involved, but the entire body, in an effort to ensure that mistakes are not repeated elsewhere. One area in which HMRC has learned lessons from such complaints and improved its processes is alternative dispute resolution. It uses the skills of an independent HMRC facilitator to work with customers, agents and caseworkers to try to reach an agreement and resolve disputes.

HMRC has held a successful pilot and is now rolling out that approach more widely, and I hope that that provides some reassurance that action has been taken, following the ombudsman’s report to improve performance in this area. However, I have seen from correspondence that my hon. Friend’s constituents raise concerns about the “agenda” of the ombudsman in failing to uphold entirely the complaint made, and suggest that if I accept the conclusions reached by her, I am condoning “dishonesty, deceit and collusion”. Although I have every sympathy with my hon. Friend’s constituents, and I understand the frustrations that they have experienced, I strongly contest that suggestion. There can be no doubt about the independence of the ombudsman from HMRC—or indeed any Government Department—and I therefore believe her judgment in this matter to be sound.

My hon. Friend’s constituents have been critical of the level of payment awarded, as it is significantly below the amount they believe would represent sufficient recompense for the expense incurred and anxiety caused by the compliance check. Compensation has, however, been paid for the identifiable and evidenced expense incurred as a result of the extended investigation and, additionally, a compensation payment has been made for the unnecessary suffering caused by HMRC’s handling of the matter, in accordance with the instructions of the ombudsman. As my hon. Friend rightly points out, the payment is much higher than is normally the case in such circumstances. However, the ombudsman did not find sufficient evidence of economic loss and accordingly did not direct HMRC to pay any compensation in that regard.

I reiterate my apologies and sympathies to my hon. Friend’s constituents for the undoubted worry and distress caused to them as a result of failings at HMRC or the Inland Revenue, as it was for much of that time. It is always regrettable when avoidable errors such as those made during this investigation result in the kind of personal hardship that no amount of financial compensation can eradicate.

I have been listening to this debate with great interest and I must say that Mr and Mrs Nelson have inherited the fighting spirit of the great admiral who shared their surname. I have a similar case in which HMRC is pursuing a medium-sized firm for about £1 million in notional lost tax for goods that were bound for export but were stolen. The firm was an innocent party and the tax is notional, but HMRC is threatening the livelihoods of 40 employees and will not let the matter go. When the Minister says that such cases are always unfortunate and that we should put up our hands and say sorry, will he take a sympathetic view and have a word with the organisation to say that sometimes it is better to prevent the wrong from taking place in the first place, rather than having to apologise for it afterwards?

I am grateful for my hon. Friend’s intervention. It is not possible for me to comment on individual cases, although I know that he has taken a close interest in that matter for some time. Perhaps we can have a quiet word about it afterwards. It is not possible for me, as a Minister, to intervene in operational matters, but it is right that HMRC has the correct procedures in place.

To return to the case raised by my hon. Friend the Member for Altrincham and Sale West, it is perhaps worth reflecting on the fact that it originated in 2001. The UK’s tax authority has undergone radical changes since then, not least with the formation of HMRC itself. While that does not in any way excuse the errors that were made, the organisation has made significant improvements in the past 12 years. Furthermore, let me reaffirm my faith in the work of the parliamentary ombudsman—in the context of HMRC and beyond. I have trust in her impartiality and independence. Although I appreciate that this is not the answer that my hon. Friend is looking for, and I have no doubt that he will continue to represent the case of Mr and Mrs Nelson strongly, the ombudsman has reached her conclusion and it should be respected.

Sitting suspended.