During the selection stage of the procurement process, bidders will be asked to self certify their tax compliance "via a simple question" as to whether they have had any 'occasions of non-compliance' within a defined period - proposed to be any time in the last ten years.
Non-compliance will occur if a tax return is found to be incorrect as a consequence of HM Revenue & Customs (HMRC) successfully taking action under the new General Anti Abuse Rule (GAAR), under any targeted anti-avoidance rule (TAAR), or under the “Halifax abuse” principle. The Halifax principle applies in relation to VAT and potentially some cross-EU border direct tax planning.
There will also be non compliance if any tax return 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 or the supplier’s tax affairs have given rise to a conviction for tax related offences or to a penalty for civil fraud or evasion.
HMRC is "successful" in this context when a tax return is amended, whether following the outcome of litigation or simply by agreement between HMRC and the taxpayer.
Foreign suppliers and suppliers with tax obligations in foreign jurisdictions will be required to certify that there has not been an ‘occasion of non compliance’ in relation to the equivalent foreign tax rules.
Jason Collins, a tax expert at Pinsent Masons, the law firm behind Out-law said "The government has taken a bold step, but there are concerns over the implications of the proposals."
The relevant Government department will use the information received in response to the question as part of the overall assessment of the selection stage, marking responses on a ‘Pass/Fail basis’.
Cabinet Office guidance states that if a bidder self certifies that they have had an incidence of non compliance and gives an explanation, "Procurers may treat this as 'pass' or 'fail' depending on the information provided, since it will contain information relating to a) the extent of their non-compliance (i.e. 'aggravating factors') and b) the extent to which the supplier has made improvements to prevent recurrence (i.e. 'mitigating factors')".
The guidance states that more than one occasion of non-compliance, a large penalty or criminal sanction and a recent event would all be considered as aggravating factors. Where the Government department believes the information from the bidder shows a serious occasion of non-compliance, it must seek legal advice before proceeding with the supplier or the procurement, and before excluding that supplier on this basis.
The proposals say ‘mitigating’ factors should allow some companies to be exempted from the ban, but Collins said that without defining what ‘mitigating’ circumstances are, it will be up to civil servants to decide. "The proposals give too much influence to bureaucrats and could result in companies risking challenging HMRC on tax avoidance disputes rather than deciding to settle.” he said.
"Many companies have settled with HMRC over tax avoidance disputes and have since acted in good faith, but now they could be barred from procurement contracts all the same having admitted to using tax avoidance schemes.” said Collins.
“The Cabinet Office should specify what mitigating circumstances might be applicable – they should include a record of settling disputes with HMRC and agreeing to change their ways. This can be done through HMRC’s High Risk Corporate Programme.” Collins said.
The rules will also enable Government departments to include a new clause in contracts that allows them to terminate an agreement if a supplier has an 'occasion of non-compliance'. The supplier will be legally obliged to tell the contracting department if their status changes after the award of the contract.
A consultative document sets out further details of the proposals. It recognises that there needs to be a time limit for the period covered by the declaration as suppliers may reasonably not hold records beyond a certain point. The document states that the exact time limit is still under consideration and needs to take into account that "Tax cases can take a number of years before a court hands down a final decision". A ten year limit is proposed.
The rules only apply to central government contracts but other public bodies or public service providers will be "encouraged to look at the practicality of applying this guidance".
The rules will apply to all taxes within HMRC's control – including VAT and stamp duty land tax.
"These new rules are another significant tool as they will enable Government departments to say no to firms bidding for Government contracts where they have been involved in failed tax avoidance.” said Danny Alexander
In the Autumn Statement the Chancellor of the Exchequer confirmed that the Government intended to use its purchasing power to deter taxpayers from engaging in tax avoidance.
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”.
Last month the heads of tax of the UK's four largest accounting firms appeared before the Public Accounts Committee (PAC) to defend themselves against claims that they help companies avoid paying tax and exploit their role advising on legislation to find loopholes in it for clients.
Margaret Hodge, who chairs the PAC, told the Financial Times that the PAC would be looking at government procurement as part of its investigation into tax avoidance.