Katherine Calder, Senior Associate, Berwin Leighton Paisner LLP:
In the 2012 Autumn Statement, the Chancellor of the Exchequer confirmed plans (first announced in September 2012) to use of the public procurement process to deter tax avoidance and evasion. A discussion document and draft guidance for consultation followed in February 2013 and on 20 March 2013, in the 2013 Budget report, the government confirmed that the new policy would be introduced from 1 April 2013.
This post outlines the scope of the new policy ultimately implemented by the government, looks at the issues that remain with it and considers what services providers need to be doing.
The policy
Potential service providers or contractors wishing to tender to any central government department, executive agency or non-departmental public body for a contract advertised after 1 April 2013 and over £5 million in value will have to self-certify their tax compliance post 1 April 2013 at PQQ selection stage.
Where there has been an “occasion of non-compliance”, as defined by this new policy, the provider may be excluded from tendering on the basis of Regulation 23(4)(g) of the Public Contracts Regulations 2006 (PCRs), which provides for discretionary exclusion on the grounds that the economic operator has “not fulfilled obligations relating to the payment of taxes…”. However, in some cases the issue may be addressed (or waived) by assurances for future “good behaviour”.
There will be an “occasion of non-compliance” if any of the following apply:
- A tax return is found incorrect or amended as a result of successful HMRC action under the new general anti-abuse rule (GAAR) or (in VAT cases) the “Halifax principle”.
- The supplier has been involved in a failed scheme requiring notification under the Disclosure of Tax Avoidance Scheme (DOTAS) rules.
- The supplier has been convicted of a tax-related offence or suffered a penalty for civil fraud or evasion.
The provisions will apply to providers based in foreign jurisdictions by reference to corresponding rules in their own country.
The government propose that disclosure should apply to all occasions of non-compliance in the preceding six years (but no further back than 1 April 2013).
Tenderers will be asked to self-certify whether an occasion of non-compliance has occurred and, if it has occurred, what steps the organisation has put in place to ensure it will not occur in future. This statement of assurances will be assessed by the contracting authority when deciding whether to exclude the economic operator or not from the competition.
In addition, government contracts above the £5m threshold are to include standard terms to allow for termination of the contract in the event of “occasions of non-compliance” by the contractor/supplier or its subcontractors in the future. No draft standard terms have yet been published for consultation.
The issues
The government’s initial consultation document setting out a first draft of this policy was particularly draconian and received a large number of responses pointing out both inconsistencies with EU procurement law and general impracticality.
Thankfully, the final policy has been significantly tempered but it still poses interesting issues for any contracting authority seeking to implement, namely:
- How will it be able to judge what is unacceptable tax avoidance and what is not?
- Will HMRC be able to support every affected procurement?
- Will the contracting authority or HMRC have the appropriate expertise to review notified “occasions of non-compliance” in other tax jurisdictions?
- How can statements of assurances and mitigating factors from tenderers from different tax jurisdictions, with very different tax laws, be evaluated equally?
Litigation on this seems inevitable, as the potential for claims based on unequal treatment of tenderers seems obvious.
Given the UK’s new anti-abuse tax law, UK tenderers are more likely to be adversely impacted by the changes as the reality is that many other jurisdictions do not have this type of tax avoidance (as opposed to illegal tax evasion) legislation. Is the potentially greater domestic impact an “own goal” in terms of promoting UK business?
Moreover, the policy appears inconsistent with the European Commission’s approach: that Member States should not exclude any tenderer on this ground where the tenderer can show that they have since paid the taxes due or have come to a settlement with the relevant tax authority. This UK policy, however, will enable UK contracting authorities to nevertheless exclude such organisations, even where no liability has been admitted and/or settlement has been agreed and sums paid.
From the perspective of tenderers for high value works, services or supply contracts, this will undoubtedly change behaviours. Whether this is in the manner contemplated by government remains to be seen. Only the economic operator tendering for the contract will be assessed, not its whole group, so it may be that large multinational or non-UK organisations will simply separate their UK public sector business entities from the rest of operations to ensure no “contamination” as a result of tax planning for the organisation as a whole.
The real impact upon the market will only be seen once the contractual drafting is published. It will be interesting to see how this will be approached and how contractors will be expected to police the tax planning of their supply chain. Moreover, for large capital projects, senior lenders are also likely to take issue with provisions which could invalidate their investment for behaviours outside their control.
What service providers need to do
Providers of works, supply or services to government under contracts above the £5m threshold should consider their organisation’s current tax position, consult with tax advisers and identify a strategy for completion of PQQs after 1 April 2013. If there are likely to be “occasions of non-compliance”, mitigating factors will need careful preparation, and the supplier is likely to have to show that it has, or will introduce, acceptable tax compliance policies. Providers based in other jurisdictions will need to identify equivalent provisions to GAAR, DOTAS and the Halifax Principle in those jurisdictions and formulate a similar strategy of response accordingly.