An internal governance body rejected a deal to waive a Goldman Sachs tax bill of as much as £20m, but was ignored by HMRC's former chief because of fears of being legally challenged by the investment bank.

The stark revelations came to light during a High Court challenge today by anti-tax cuts campaigners, UK Uncut, who took the matter to court alleging that the agreement between HMRC and Goldman Sachs was unlawful.

Among papers filed in court was a written statement by former HMRC chief Dave Hartnett, in which he explained how he had made 'an offer without reservation' to the investment bank in November 2010, before it had been assessed by an internal oversight board at HMRC.

The board subsequently rejected the deal, which Goldmans argued was an act of 'bad faith' and threatened 'to fight any attempt by HMRC to resile [turn] from it'.

Hartnett said: 'We determined that it would be in the best interests of HMRC and of taxpayers generally to stick with the settlement of 19 November. We considered that the overall result of the settlement achieved then was a very good one for HMRC and for taxpayers generally. It concluded a number of issues which had been outstanding between Goldmans and HMRC for many years.'

He added: 'We feared that re-opening the settlement may have had a significant financial cost to HMRC. Goldmans at that time were a major UK taxpayer but the relationship with HMRC had not been easy. HMRC had worked hard to try to improve the relationship with them and we were extremely worried that reneging on the agreement, which had been agreed by senior people both within HMRC and at Goldmans, would significantly damage the relationship.

'We were concerned that any perception of bad faith on HMRC's part, such as reneging on the settlement agreement, may lead to Goldmans being more aggressive in their relationship with HMRC which could result in lower tax payments in the future.'

The former HMRC chief went on to explain how Goldmans had, at the time, only recently adopted a code of practice on taxation for banks, which George Osborne had announced a few weeks previously.

He said: 'While it is not easy to put a tax figure on the value of Goldman's adoption of the Code, we considered the amount to be significant. (Additionally, and without affecting the free-standing force of our concern about the effects of Goldmans' withdrawal from the Code in terms of their future tax behaviour. I was concerned that withdrawal would have embarrassed the Chancellor).

'We were concerned that Goldmans would broadcast to the financial services community that it was no longer possible to rely on an agreement reached with HMRC.'