Summary and implications
- With effect from 1 April 2013 suppliers tendering for government contracts above the threshold will be required to declare their tax compliance history as part of the public procurement process.
- If within the last 10 years a supplier has taken part in particular failed tax avoidance schemes, it will be open to the contracting department to ban the supplier from the procurement process.
- In the future, suppliers engaged in the procurement process will need to give careful consideration to the potential long-term implications of failure before entering into tax avoidance schemes.
The draft proposals have been designed to satisfy the EU Procurement Directive and Public Contracts Regulations 2006. They are intended to emphasise the Government’s stance that aggressive tax avoidance is unacceptable by seeking to ensure that only those suppliers meeting their tax obligations can win significant government contracts.
The draft proposals
All government contracts above the EU procurement thresholds that are advertised from 1 April 2013 will require potential suppliers to self-certify their tax compliance history. The proposals extend not only to contracts advertised by central government departments but also to those advertised by executive agencies of government departments and non-departmental bodies.
Achieved by the simple addition of an extra question in the pre-qualification questionnaire, potential suppliers, including foreign entities, and even principal sub-contractors, will be asked to self-certify that they have had no “occasions of non-compliance” within the last 10 years. An occasion of non-compliance will be deemed to take place at the time that the non-compliance is recognised, rather than when the arrangement was put in place.
It should be noted that the 10-year period is yet to be finalised, although the draft guidance released suggests that this is thought to be a reasonable time frame.
A practical consequence of this is that effectively the change is retrospective as unsuccessful planning undertaken in the last 10 years could come back to haunt potential suppliers. Tax planning routinely undertaken 10 years ago was often far more aggressive than would be adopted now.
“Occasion of non-compliance”
The draft proposals define an “occasion of non-compliance” as one of the following:
Where a tax return is found to be incorrect as a result of a successful challenge by HMRC under:
- the new General Anti-Abuse Rule (GAAR);
- any targeted anti-avoidance rule (TAAR); or
- under the “Halifax” abuse principle.
- Where a tax return is found to be incorrect due to a failed scheme which was, or which should have been, notified under the Disclosure of Tax Avoidance Scheme.
- Where a supplier has been convicted for tax related offences, or incurred a penalty for civil fraud or evasion.
- Where a return is amended following litigation, or by agreement with HMRC by reason of GAAR, TAAR or the Halifax abuse principle.
The proposals in practice
It is envisaged that a supplier will be required to certify that it has had no occasions of non-compliance in the last 10 years in relation to all taxes administered by HMRC and foreign equivalents.
Where a supplier fails to answer the tax compliance question, or declares an occasion of non-compliance without providing an explanation, it is then open to the contracting department to disqualify the supplier from the process on the basis of non-compliance.
However, should a supplier declare an occasion of non-compliance and provide an explanatory statement, it will be up to the contracting department to decide, at its discretion, whether the information disclosed is serious enough to warrant disqualification from the procurement process. The contracting department will be required to take into account both aggravating and mitigating factors in making is decision.
Should a contracting department wish to exclude a potential supplier due to the circumstances surrounding an occasion of non-compliance, it will be required to seek legal advice in order to do so. It is interesting that the draft guidance suggests that a contracting department should also seek legal advice if it wishes to proceed with a non-compliant supplier in any event. The contracting authority has discretionary power under regulation 23(4)(g) of the Procurement Regulations to exclude bidders on grounds of tax non-payment. As these powers are discretionary under general public law principles, the contracting authority should consider whether it is appropriate to exercise its discretion to exclude a bidder on a case by case basis.
The tax compliance obligations do not cease once a supplier has won the contract. Going forward there will be additional contractual provisions within government contracts that will:
- oblige a supplier to notify the contracting department of any change in status due to an occasion of non-compliance during the life of the contract; and
- permit the contracting department to terminate the contract should the supplier be found to be in breach of the tax compliance obligations.
This contractual change introduces real risk into a contract for a supplier if something emerges during the course of the contract. In a large acquisitive group, does the parent company know exactly what all the subsidiaries have been up to over a 10-year period?
Draft versions of these clauses have not yet been released.
Given their potentially retrospective nature, there will be an immediate concern amongst potential suppliers that these proposals may jeopardise their chances of successfully winning a government contract due to tax issues arising a number of years previously.
When providing the requisite information as part of the self-certification process, suppliers will need to carefully consider the explanations provided for any occasion of non-compliance, with a particular emphasis on corrective action taken, so as to avoid disqualification.
Going forward, potential suppliers will also need to consider taking a commercial approach to the conduct of tax disputes with HMRC to ensure that the outcome does not have a negative impact on the self-certification process. It is important to note that even a settlement with HMRC may in itself be an occasion of non-compliance if a tax return is amended by reason of GAAR, TAAR or the Halifax abuse principle.