Since the new rules came into force in April 2013 only one of the 65 potential bidders for central government contracts worth £5 million or more failed the 'overriding mandatory procurement test', the Cabinet Office said, following a mandatory review of the policy. However, this failure was due to the bidder "being unable to provide and deliver services that would fulfil the procurement department's contract, rather than an issue of whether or not they were tax compliant", the Cabinet Office said.
Research conducted by Pinsent Masons, the law firm behind Out-Law.com, in June found that no businesses had been barred from bidding on contracts since the rules were introduced. Tax expert Ian Hyde of Pinsent Masons said that the data showed that "the popular belief that big businesses are all engaged in systematic abuse of the tax system is actually wide of the mark".
"Since the recession hit, media scrutiny of 'unfair' corporate tax arrangements has been intense, and any public outcry can be hugely damaging to a business' reputation," he said. "Companies have been quick to respond to public sentiment and political pressure, acknowledging that the potential loss of business which can result from an adverse story in the press about a company's tax arrangements is not worth the risk."
"The attitude of large companies to tax avoidance has changed significantly from the position ten or more years ago, when many of the schemes that are now hitting the courts were devised. In the main, companies are now unwilling to enter into artificial avoidance schemes and are increasingly keen to demonstrate, as part of their wider contribution to society, that their tax affairs are all above board, for example through detailed disclosure in their annual reports and in other communications with stakeholders," he said.
Since 1 April 2013, bidders on all central government contracts worth over £5m have been required to disclose any "occasions of non-compliance" included in any tax returns filed on or after 1 October 2012. Procuring authorities are able to bar non-compliant suppliers from bidding on that contract.
Items which must be disclosed include any 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) or under the 'Halifax abuse' principle, which applies in relation to VAT. The rules may also include some cross-border direct tax planning with the EU. HMRC will not be deemed to have "successfully challenged" a supplier for the purposes of the policy until all appeal avenues are exhausted.
Non-compliance also covers situations where a supplier's tax affairs have given rise to a conviction for tax-related offences or to a penalty for civil fraud or evasion. Tax returns later found to be incorrect because a scheme in which the supplier was involved should have been referred to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules will also be caught, and suppliers with tax obligations in other jurisdictions will also have to disclose non-compliance in relation to equivalent foreign tax rules.
The government had originally planned to require businesses to disclose any occasions of non-compliance dating back ten years, however this requirement was dropped after industry lobbying. Tax expert Heather Self of Pinsent Masons said that although some politicians would like to have seen the rules go further, it was right that the retrospective element was removed.
"Some MPs have said that the rules are not tough enough, but there are boundaries imposed by EU procurement rules: all government procurement processes must be based on fair and open criteria," she said. "A company cannot be barred from the process merely because its tax bill is lower than politicians might like."
"UK law will be updated shortly in any case, to comply with new EU rules which provide for a mandatory exclusion for failure to pay taxes where this has been established by a final legal decision. However, we think that most major UK companies will have little difficulty in demonstrating that they have properly complied with this requirement," she said.