* Anti-avoidance group says deal was unlawful
* Taxman says agreed settlement for good reasons
* Corporate tax avoidance is hot issue in Britain
By Estelle Shirbon
LONDON, May 2 Britain's tax authority approved a
deal with Goldman Sachs partly because the U.S. bank was
threatening to pull out of a new tax code, which would have
embarrassed the government, a court heard on Thursday.
Activist group UK Uncut Legal Action has asked the High
Court to declare that the 2010 settlement between Goldman and
the tax authority (HMRC), worth up to 20 million pounds ($30
million) to the U.S. bank, was unlawful.
"We do say that this was a sweetheart deal which let Goldman
Sachs off interest in circumstances which involved a package
deal," Ingrid Simler, a lawyer for the group, told the court,
adding that the case caused "grave public disquiet".
The action stems from public anger in Britain about how
firms ranging from Vodafone to Starbucks succeed in paying less
tax than many ordinary people hit by a stagnating economy and
government spending cuts.
The risk to Goldman Sachs is further damage to its image in
Britain after a public outcry in January caused it to scrap
plans to delay paying bankers' bonuses to make the most of an
income tax cut for high earners.
In financial terms, the disputed $30 million is a drop in
the ocean for a bank that paid its employees $12.9 billion in
compensation and benefits last year.
The case concerns a deal agreed orally by then HMRC boss
Dave Hartnett and Goldman Sachs executives in November 2010 to
end a long-running dispute over a now-banned tax avoidance
scheme involving the payment of bonuses to UK staff via an
offshore tax haven.
Other banks that had been using the scheme settled with HMRC
in 2005, but Goldman Sachs resisted paying what HMRC said it
owed for a further five years.
Simler told the court that Hartnett wrongly agreed that
Goldman Sachs should pay the principal it owed but not the
interest that had accrued during those five years, even though
there was no reason for making that concession.
"OFF THE DEEP END"
The tax authority's High Risk Corporate Programme Board
rejected the deal, infuriating Goldman Sachs which "went off the
deep end", according to an email from Hartnett read out in
The bank threatened to withdraw from a new code of practice
aimed at reducing tax avoidance by banks which had been
announced by finance minister George Osborne the previous week,
according to Hartnett's written witness statement to the court.
"I was concerned that withdrawal would have embarrassed the
Chancellor," Hartnett said in the statement.
In an internal email dated Dec. 7, 2010, Hartnett cited the
risk of "major embarrassment" to himself, HMRC and Osborne. He
eventually approved the deal despite board opposition.
"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 said in a
The Treasury and Goldman Sachs declined to comment.
Hartnett's witness statement said the overall settlement
"was a very good one for HMRC and for taxpayers generally".
"We feared that re-opening the settlement may have had a
significant financial cost to HMRC," he wrote, saying that
Goldman had made it clear it considered the November oral
agreement binding and would fight any attempt to go back on it.
James Eadie, a lawyer representing HMRC, told the court that
fear of embarrassment had been "at the bottom of the scale" of
the factors taken into consideration in approving the deal.
Eadie also pointed to a report by the National Audit Office
published in June last year, which found that five settlements
between HMRC and big firms, including the Goldman deal, were
reasonable because HMRC may have received less if it had
litigated and lost.
Judge Andrew Nicol reserved his judgment to a later date.