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Senior revenue and customs officials appeared before the public accounts committee today to be told that their department scored a "massive own goal" by using an offshore company to manage its properties.
In 2001 the Inland Revenue and Customs and Excise, later merged to form HMRC, signed a 20-year contract with Mapeley STEPS Contractor Ltd, handing over ownership and management of 60% of HMRC properties to the private contractor.
Lesley Strathie, chief executive of HMRC, told the public accounts committee she is not embarrassed by the deal, despite the fact that Mapeley avoids paying UK tax by holding its assets in Bermuda.
She said that more than 80% of companies in the property management business hold their properties offshore and a more strategic view should be taken.
Nick Friedos, chief executive of Mapeley Estates Ltd, told the committee that 80 per cent of the Mapeley parent company is owned by US hedge fund Fortress, with the remaining 20 per cent held by management and private investors.
It was floated in 2005 and then de-listed in April 2009 as Fortress held more than 75 per cent of the equity.
A board of directors resides in Bermuda but all staff are in London. The deal with HMRC was worth £4bn.
Stathie said there is little point having a "procurer/supplier" relationship with Mapeley and there has to be "real understanding to get best value".
John Pugh (Lib Dem, Southport) wanted to know how plans to close 130 HMRC offices in the next year would affect Mapeley.
Friedos said freehold properties will be sold and the others re-let and it is "our business" to deal with changes in the property portfolio.
He declined to say how much the company would be paid in relation to the closures.
Strathie said that of the 3,400 employees in the offices that are being closed, 1,900 will be transferred to other locations and the remainder offered options such as severance.
She said HMRC will not require new buildings, despite a commitment not to close any 'face to face' offices used by the public.
Geraldine Smith (Lab, Morcambe and Lunesdale) asked how much more the Mapeley contract has cost than first anticipated.
Simon Bowles, HMRC's chief financial officer, told her that the Mapeley bid was for £2.3bn and the estimated cost for the life of the contract is £3.87bn.
Smith said that as the contract has cost £570m more than estimated and its purpose was to save the taxpayer £300m, the property portfolio would have been better left under public sector control.
Strathie denied that HMRC had lost flexibility by entering into such a long contract.
She said that managing properties is not her department's core business and without the contract the merger of Inland Revenue and Customs and Excise would have been more difficult.
However, she said she "absolutely accepts" the National Audit Office's report into the contract and its recommendations.
Ian Davidson (Lab, Glasgow South West) asked what benefits there are for Mapeley in Bermuda, apart from avoiding tax.
Friedos admitted that tax avoidance is the only benefit, though he himself is resident in the UK for tax purposes.
He insisted that the £55m tax bill avoided by Mapeley is passed back to the taxpayer as a lower price to HMRC.
The company would seek compensation if the properties were returned to the UK.
Dave Hartnett, permanent secretary for tax, explained that the concept of a company holding investments offshore has been common for many years.
In fact transactions from last year show that 82 per cent of commercial properties in London are held offshore.
Hartnett said he regretted that those working on the contract were not told that tax avoidance would be a reason to reject Mapeley as a partner.
Friedos told the committee that government officials knew the company was offshore when they signed the contract.
Edward Leigh (Con, Gainsborough), chairman of the public accounts committee, asked how much tax has been lost as a result of this contract.
Hartnett said it was between £2.5m and £3.5m in capital gains and that has "no material effect" on the assessment of the contract's value for money.
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