A new policy that will allow Government departments to exclude companies and individuals, which take part in tax avoidance, from being awarded Government contracts, has been unveiled.
However, the proposed rules contained in the consultation draft, may not be as wide-ranging as the headlines suggest and are apparently intended to be as "light touch as possible". The rules are unlikely to exclude companies (some of which have attracted much press comment recently) who simply arrange their global tax affairs in a way which minimises their UK corporation tax liability.
Under the new policy, potential suppliers to Government will have to self-certify, as part of the selection stage of above-threshold procurements, their recent tax compliance history. Companies will have a so-called "occasion of non-compliance", which could result in their exclusion from the bidding process if:
Any tax return is found to be incorrect as a consequence of HMRC successfully taking action:
- Under the General Anti-Abuse Rule (GAAR) to be enacted in Finance Bill 2013
- Under any targeted anti-avoidance rule (TAAR)
- Under the "Halifax abuse" principle (concerning VAT avoidance)
- Any tax return that is found to be incorrect because a scheme which the supplier was involved in, and which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, has proved to have failed
- The supplier's tax affairs have given rise to a conviction for tax related offences or to a penalty for civil fraud or evasion
If a tax return is amended either following litigation or simply by agreement with HMRC, by reason of GAAR, TAAR etc, this will also be treated as an "occasion of non-compliance."
Suppliers who self-certify that they have had an "occasion of non-compliance" may avoid exclusion if they can provide an explanatory statement evidencing the steps taken to prevent a recurrence. However, this is at the Government department’s discretion according to the seriousness of the non-compliance and the steps taken to prevent recurrence.
In addition to the possibility of excluding suppliers at the selection stage, Government departments must ensure their contracts contain standard clauses enabling them to terminate if a supplier has had an "occasion of non-compliance" after the contract has been entered into, and an obligation to notify changes in relation to tax compliance. Failure to do this will also trigger remedies including, potentially, termination of the contract.
To ensure that UK suppliers are not unfairly disadvantaged, foreign suppliers will be required to certify that there has not been an "occasion of non-compliance" in relation to the equivalent foreign tax rules.
Effective from 1 April 2013, this new policy will apply to all central Government above-threshold contracts advertised in Official Journal of the European Community (OJEU) and to which the EU procurement rules apply. It is intended to apply to all central Government departments, their executive agencies and non-departmental public bodies.
As a matter of procurement law the relevant rules regarding the discretionary exclusion of suppliers in this context are either that:
- The supplier has not fulfilled its obligations relating to the payment of taxes under UK law, or the law of the relevant member state where the supplier is established
- The supplier has committed an act of grave misconduct in the course of their business or profession
Although the draft proposals refer to suppliers’ "recent" tax compliance history, the time frame suggested for self-certification is the preceding ten years. This has the potential to go beyond the limits of procurement law if it captures a supposed "occasion of non-compliance" which, at the relevant time, was not unlawful. Government departments will therefore need to take care to avoid the over zealous exclusion of suppliers under the new policy, or they could be at risk of challenge for breach of procurement law.
This new initiative continues a recurring theme by the UK Government of seeking to deliver its policies through procurement. Another example is the Government’s push to open up the market to small and medium sized enterprises.