The Treasury and the Cabinet Office have unveiled measures that mean companies involved in tax avoidance schemes could be barred from Government contracts. David Hansom looks at the implications.
As part as of the new tougher regime on tax avoidance, the Government has proposed that companies which were a party to successfully challenged tax avoidance schemes can be prevented from being awarded Government contracts. The Cabinet Office has published new rules which it says can lawfully be applied within the existing EU procurement regime.
The rules came into effect from 1 April this year and are reported to apply to contracts worth £2 million or more.
Bidders will be required to disclose any 'occasion of non-compliance'.
Importantly, examples of non-compliance include having a tax return ruled as incorrect because a tax avoidance scheme to which the bidder was a party has been successfully challenged by HMRC any time during, it is reported, the last 10 years. Similarly, a bidder will need to inform the awarding party if it has been convicted of tax related offences or has received a penalty for fraud or evasion.
In each of the circumstances above, the department can disqualify the bidder from the procurement process. The Government says that this will be treated as a pass/fail question at the pre-qualification questionnaire stage under the existing ground of discretionary exclusion in regulation 23(4)(g) of the Public Contracts Regulations 2006 ("the Regulations") which requires bidders to confirm that it has "fulfilled [all] obligations relating to the payment of taxes under the law of any part of the United Kingdom or of the relevant State in which the economic operator is established".
The rules also permit a Government department to insert a clause into contracts it awards to trigger early termination of a contract if the contractor commits an act of non-compliance during the contract term.
It is possible that the rules will work in favour of small and medium sized businesses as these are perhaps less likely to become involved in aggressive tax schemes which are successfully challenged by HMRC.
Most significantly, it is likely to result in fewer public sector focused bidders becoming involved in schemes which could be closed by HMRC in the future. It is likely to be very difficult for large multinational bidders to confirm that there are no such possible schemes which have been or are currently being investigated. The due diligence requirements on bidders will doubtless increase as it will be the duty of the contractor itself to inform the Government department if a non-compliance event takes place. Bidders may seek to negotiate specific opt outs or even to pass on the compliance cost to public bodies through their contracts.
These are interesting times.