Jason Collins, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com said: "HMRC believes that it should be able to influence the behaviour of companies bidding to do work for the Government. Questions around the bidder's approach to tax mitigation will become as common place as those about Diversity, Bribery Act and CSR policies. The Government will expect the company not to take an aggressive approach to tax planning. In some cases, aggressive tax avoidance may cause the company to fail in its bid."
If the new arrangements are to be effective from April 2013, the detail of the proposals will presumably have to be announced before that date, Collins pointed out. He commented that one key issue will be the definition of "avoidance". It is also not clear how far the measure will go, he said. One possibility is that HMRC will also look at the personal tax compliance position of the directors and owners of those businesses, Collins added.
"The Boards of private sector businesses will need to check their overall strategy on tax compliance and risk. It will need to be properly documented, available for all to see and - most importantly - they will not be able to pursue activities which HMRC believe fall on the wrong side of the line." said Jason Collins. "The problem is where the line is drawn - commonly used tax planning techniques may be deemed 'unacceptable' by HMRC. A business might not want to take the risk of failing this aspect of the procurement process so may take a cautious approach." he said.
As a starting point Collins recommended that the Board should be fully aware of the historic tax strategy and of any risks in the light of HMRC's likely approach.
It is proposed that the measure will extend to evasion as well as avoidance.
Jason Collins said "We will have to wait for the details, but the measure is likely to extend to checks on what steps a business is taking to make sure it is not engaging with tax evaders even if it is not evading tax itself. For example, the Government might expect that a construction company has robust policies around how it pays contractors and gang masters. Even if the business may not be legally liable for the loss to fraud, the Government may not award contract to companies which are not doing enough to stamp out bad practices in the industry."
The Chief Secretary to the Treasury, Danny Alexander first announced in September that HMRC and the Cabinet Office had been asked to look into how the Government could use the procurement process for Government contracts "to deter the very small minority of companies and individuals that do so from evading tax and using aggressive tax avoidance schemes".