ANY COMPANY bidding for lucrative government contracts could see itself blackballed if it is found to have used aggressive tax structures, under new procurement rules laid down by the Treasury.
The new rules, which apply from 1 April 2013, are significantly less onerous than the original proposals put out for consultation in February. But they still represent a major shift in government policy and will require bidding companies to declare if they have been at loggerheads with HMRC over the use of a tax structure.
The new guidance will apply to all central government contracts above £5m, with similar guidance likely to be applied to Scottish government procurements, while other public bodies – such as local authorities, for example – will be encouraged to look at the practicality of applying the new guidance.
What do the rules say?
There will be a new pass/fail question included in the pre-qualification questionnaire for all relevant contracts. Bidders will be required to self-certify whether they have had any “occasions of non-compliance” in relation to tax during the previous six years. An occasion of non-compliance arises where the bidder has accepted, or a court has determined, that additional tax is payable under certain anti-avoidance rules.
The new rules only apply to non-compliance after 1 April 2013, and in respect to tax returns filed on or after 1 October 2012. The original proposals would have required bidders to review their tax history for the previous ten years, a measure that many felt would have been unworkable.
If bidder have had an occasion of non-compliance, they will need to provide an explanatory statement setting out any mitigating factors – for example, that there has been a break from past behaviour. At buyers’ discretion, they can then pass or fail the bidder, according to that statement.
Importantly, there will also be draft contract clauses, which could lead to the termination of a contract if there is a subsequent occasion of non-compliance. This will lead to a much greater need for bid teams to be fully aware of any potential tax litigation or settlements with HMRC.
Which entities does this apply to?
The policy will apply to any supplier that satisfies the economic operator test in procurement law. In practice, this will generally mean the bid company itself, together with any other group or company substantially involved in the bid – for example, one that is providing finance or technical assistance. However, groups will not need to certify on behalf of any other group companies not directly involved in the contract.
Sub-contractors performing a significant part of a project will also need to certify and, in a joint venture bid, all joint venture parties will be required to certify.
What do bidders need to do?
There will need to be close liaison between bid teams and tax and legal teams, to ensure relevant information is readily available within the tight timescale of bid response times.
The group should identify significant entities likely to be involved in government contracts, together with key sub-contractors and joint venture partners. Additional contractual provisions may be needed to ensure that the group is protected if a sub-contractor or joint venture partner has an occasion of non-compliance in future.
If the group has open issues around tax avoidance, these will only give rise to a disclosure obligation if the relevant return was filed on or after 1 October 2012. However, issues for earlier periods could cause embarrassment if there is a major tax settlement or litigation after a contract has been awarded. Groups may therefore want to seek to clear the decks in a way that does not damage relationships with government buyers.
Proactive bidders may wish to consider updating their group’s policy on tax behaviour, in order to make it clear that they are committed to ensuring compliance with this measure on an ongoing basis.
Heather Self is a tax partner (non-lawyer) at Pinsent Masons