Introduction of major procurement changes should be delayed says expert

Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, was speaking as a consultation by HM Revenue and Customs (HMRC) on changes to the procurement process (8-page / 63KB PDF) and a parallel consultation by the Cabinet Office (10 pages / 197KB PDF)  were due to close. He said that it was "ludicrous" that the Government had only allocated two weeks to consult on "an important proposal, with far-reaching consequences". The consultation closes on 28 February.

The changes are due to take effect from 1 April 2013, according to the Treasury's original announcement. Pinsent Masons "strongly recommends" that this be postponed by at least six months in its response to the consultation.

Self-certification will apply to all companies bidding for Government above-threshold contracts according to the consultation document, which was published on 14 February. During the selection stage of the procurement process, bidders will be asked "via a simple question" whether they have had any "occasions of non-compliance" within a defined period.

Non-compliance will cover occasions where a tax return is found to be incorrect as a consequence of 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-border direct tax planning within the EU. Non-compliance will also cover situations where the supplier's tax affairs have given rise to a conviction for tax-related offences or to a penalty for civil fraud or evasion.

There will also be non-compliance if any tax return is found to be incorrect because a scheme which the supplier was involved in has proved to have failed. This will apply to schemes which were, or which should have been, referred to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. The Government has proposed that disclosure requirements will cover the previous ten years.

The ten-year limit would amount to an "almost impossible compliance burden" for bidders Pinsent Masons says in its response to the consultation. It recommends that the disclosure period be reduced to a maximum of four years, with no look back beyond 1 April 2013.

Pinsent Masons says it appears that the rules will apply to the "economic operator" bidding for each contract.  It calls for confirmation that this will be interpreted consistently with other areas of procurement guidance, so that it will apply to the bid company itself together with any other company or sub-contractor on whose resources the bidder intends to rely.

Pinsent Masons' response also calls on the Government to provide a "clear definition" of relevant TAARs. It points out that as the term has "no technical meaning", it is not clear exactly which anti-avoidance rules will be covered. The consultation states that foreign bidders would have to disclose breaches of "equivalent foreign tax rules"; however it does not make it clear how these would be defined.

"While the ''Halifax' abuse principle is common across the EU, most direct tax anti-avoidance rules are fundamentally different, not least because most EU jurisdictions rely on civil rather than common law principles," Pinsent Masons says in the response. "The guidance appears to hand a significant competitive advantage to bidders from jurisdictions such as Hong Kong, which have much simpler tax systems and limited anti-avoidance rules."

Pinsent Masons says that the "fundamental difficulty" with the proposals is that Government procurement teams with "little or no understanding of the subject matter" will be required to review highly technical disclosures on tax matters. The guidance states that more than one occasion of non-compliance, a large penalty or criminal sanction or a recent event will all be considered as aggravating factors, but that undefined "mitigating" factors should allow some companies to be exempted from the ban.

However, Pinsent Masons warns that without greater clarity over what mitigating factors could be considered, the proposals give too much influence to civil servants. It calls for guidance to clarify that there are situations which will always be a sufficient mitigating factor to justify a "pass". It says this could include a dispute settled some years ago, with the taxpayer having maintained low risk status since then, or the taxpayer clearing open issues now in HMRC's favour.  

"Unless there is greater clarity on what constitutes a mitigating factor, taxpayers who agreed to settle an issue some years ago may now be barred from a Government contract, even though that could not have been foreseen at the time of the settlement," says the response. "Going forward ... taxpayers may prefer to litigate rather than settle, since settlement will clearly be an occasion of non-compliance whereas litigation may result in victory for the taxpayer, or a decision in favour of HMRC but on grounds other than a TAAR."