Tax and procurement

Out-Law Guide | 20 Aug 2013 | 2:37 pm | 6 min. read

This guide was updated in December 2015 

This guide sets out key areas to be considered by bidders and buying departments in implementing the Cabinet Office Guidance on Promoting Tax Compliance and Procurement.

Which contracts does this apply to?

The Cabinet Office Guidance on Promoting Tax Compliance and Procurement.(theguidance)applies to all central government contracts of  £5m or above.

Similar guidance is likely to be applied to Scottish government procurements.

Other public bodies and public service providers are to be encouraged to look at the practicality of applying the guidance to their procurement where it is over £5m in value.

The guidance is currently being updated to reflect the new Public Contract Regulations 2015 (PCR 2015). Any buying department intending to take a selection decision using this guidance should therefore seek legal advice before proceeding.

What do the rules say?

Bidders are required to self-certify whether they have had any "occasions of non-compliance" (OONC) in relation to tax during the previous 6 years.  An OONC arises where the bidder has accepted, or a Court has determined, that additional tax is payable in circumstances where anti-avoidance rules have been engaged.  Bidders must also disclose any criminal convictions for tax-related offences, or penalties for civil fraud or evasion.

Importantly the rules only apply to occasions of non-compliance that occur on or after 1 April 2013 and in respect of tax returns filed on or after 1 October 2012.

Bidders who have had such OONCs will need to provide an "explanatory statement" setting out any mitigating factors – for example, that there has been a break from past behaviour and the bidder no longer engages in tax planning which might be affected by anti-avoidance measures.  The buyer usually has discretion to pass or fail the bidder according to that statement.

Furthermore, any OONC occurring after a contract has been won can lead to termination of the contract.

Which entity does this apply to?

The policy applies to any supplier which satisfies the "economic operator" test in procurement law.  In addition to the bid co itself, this is likely to apply to any group company substantially involved in the bid, for example one which is providing technical assistance or a financial guarantee.  However, the self-certification by a member of a group does not cover other group companies who are not themselves required to certify.

What about sub-contractors and joint ventures?

Sub-contractors performing a "significant part" of a project also need to comply with the measure. The bidder need not certify compliance on behalf of sub-contractors.

In joint venture bids, all joint venture parties are required to certify even though they establish a special purpose vehicle.

What about bidders with foreign tax obligations?

Foreign bidders, and UK bidders with tax obligations in foreign jurisdictions, are required to certify that there has not been an OONC in relation to the equivalent foreign tax rules. The guidance provides that an OONC can arise if a business has a scheme which fails under rules in other countries which are equivalent to the UK's DOTAS and GAAR rules or to the "Halifax" abuse principle. The guidance suggests that there should be no particular difficulties for international operators in self–certifying as they should be familiar with the tax rules applicable to the territories where they are required to pay tax.

However, this is likely to cause some difficulties in practice, both for buyers trying to understand foreign disclosures and for bidders trying to decide what the "equivalent" foreign tax rules are.

What do buyers need to do?

Pass/fail questions must be incorporated into the standard PQQ; buyers will not be required to supplement these questions with additional questions or information. The questions are as follows:

"Q1: The supplier must state whether, from 1 April 2013 onwards any of its tax returns submitted on or after 1 October 2012;

1.1 has given rise to a criminal conviction for tax related offences which is unspent, or to a penalty for civil fraud or evasion; and/or

1.2 has been found to be incorrect as a result of:

  • HMRC successfully challenging it under the General Anti-Abuse Rule (GAAR) or the “Halifax” abuse principle; or
  • a tax authority in a jurisdiction in which the supplier is established successfully challenging it under any tax rules or legislation that have an effect equivalent or similar to the GAAR or the “Halifax” abuse principle ; or
  • the failure of an avoidance scheme which the supplier was involved in and which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS) or any equivalent or similar regime in a jurisdiction in which the supplier is established."

If a bidder answers “yes” to either of the questions it may provide details of any mitigating factors that it considers relevant and that it wishes the buyer to take into consideration.

If a bidder self-certifies that it has had an OONC the buyer may decide to exclude it on this basis. However, any decision is at the discretion of the authority

It is only if the non-compliance falls within the mandatory exclusion criteria under the PCR 2015 (where the breach has been established by a judicial or administrative decision having final or binding effect) that the buyer would have no discretion and would be obliged, except in limited circumstances, to exclude it.

The PCR 2015 provide that the buyer may disregard the mandatory exclusion when it would be clearly disproportionate (e.g. the amount of unpaid taxes is minor) or would go against the public interest (such as public health or the protection of the environment). The PCR 2015 also provide that the mandatory or discretionary exclusions for non-payment of taxes cease to apply when the bidder has fulfilled its obligations by paying the taxes or entered into a binding arrangement with a view to paying the taxes.Where a bidder self-certifies that it has had an OONC, and provides an explanatory statement, the buyer will have to review the statement and consider whether there are any aggravating or mitigating factors.  The guidance gives examples of mitigating factors which may be taken into account. These include:

  • changes of senior management or key senior personnel with responsibility for tax since the OONC where the new personnel have stated to the buyer that they will not engage in similar tax avoidance
  • the company's policy concerning tax planning has changed "to become more in line with government objectives regarding tax avoidance"
  • the OONC was an isolated one and there is no indication that the business generally adopts an 'aggressive' tax stance.

Reviewing the detailed explanatory statement is likely to be difficult for a non-tax specialist, so buyers may need to seek technical support from their in-house or external tax advisers. Buyers can seek advice from the ERG service desk and HMRC will provide support and advice through the service desk. If a buyer believes the information received represents serious non-compliance, it should seek legal advice before proceeding with, or excluding, the supplier. As in all cases, buyers must treat bidders equally and without discrimination, and act in a transparent way.

Once the contract is awarded as a result of the procurement process, the buyer must also ensure that it contains provisions which oblige the successful bidder to keep the buyer notified of any OONC during the life of the contract and to confirm that the statements made about tax compliance as part of the bidding process remain correct when the contract commences. The contract must also include a right for the buyer to terminate for breach of the tax compliance obligations. Standard suggested drafting is provided in the guidance

What do bidders need to do?

Bidders will need to be ready in advance of bids to deal with the tax questions.

If in the future a bidder establishes that HMRC have succeeded in an anti-avoidance challenge which amounts to an OONC, it will need to disclose that event to buyers under existing contracts entered into after 1 April 2013 and also make an explanatory statement in any subsequent bids.  The explanatory statement for new bids may take some time to prepare.

Any subsequent occasion of non-compliance during the life of the contract entered into following a post April 2013 bid will need to be disclosed, and in serious cases could lead to the contract being terminated.  However, active dialogue with the buyer is likely to reduce the adverse impact of the non-compliance.

Tax compliance will be a continuing issue for both contracts already won and ongoing bids.  This will require continuing close liaison between business, legal and tax teams.

Where a bidder has an open issue around tax avoidance which relates to a return filed on or after 1 October 2012, it will need to think carefully about the timing, scope and grounds of any settlement. 

Where there are open issues for earlier periods, these will not result in an occasion of non-compliance but could cause embarrassment if there is a major tax settlement or Tribunal decision after a contract has been awarded.  Bidders should therefore consider seeking to "clear the decks" in a way which does not damage relationships with Government buyers.

Pro-active bidders may wish to consider updating their group's policy on tax behaviour, to make it clear that they are committed to ensuring compliance with this measure on an ongoing basis.

Contacts: Heather Self, Ian Hyde or Stuart Cairns