Cabinet Office finalises guidance on using the procurement process to promote tax compliance

The document sets out how government departments should assess suppliers' tax compliance declarations and the new clauses which should be included in contracts. It also includes examples of mitigating and aggravating factors that a department can take into account when deciding whether or not to disqualify a supplier on the basis of this information. The new policy came into force on 1 April 2013 and applies to all central government contracts worth over £5 million.

"The revised guidance confirms that any future breach of tax compliance obligations could lead to termination of the contract, with major commercial implications," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.

"The standard draft clause requires any issues to be notified to the Purchasing Authority within five working days, which will be a demanding deadline for many large corporate groups. Tax, legal and commercial teams should liaise now to ensure that clear reporting processes are in place," she said.

Under the new procurement process, bidders will be asked whether they have had any "occasions of non-compliance" (OONCs) in any returns filed on or after 1 October 2012. Non-compliance covers 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 and potentially some cross-border direct tax planning within 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, according to the guidance.

Non-compliance will also cover 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 which the supplier was involved in has proved to have failed, or which should have been referred to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, will also be caught.

Suppliers with tax obligations in other jurisdictions will also have to make a disclosure if there has been an OONC in relation to equivalent foreign tax rules, the guidance said.

"The policy is based on self-certification by suppliers and not on enquiry or audit by the Authority," the guidance said. "Large international operators should be familiar with the tax rules applicable in those territories where they are required to pay tax, and this will include those rules which relate to avoidance or abuse. Therefore, there should not be particular difficulties for international operators when self-certifying."

According to the guidance, departments can choose whether or not to exclude suppliers that disclose on OONC at their discretion unless that OONC is grounds for mandatory exclusion. Departments can take into account "any mitigating factors provided as part of the supplier's response", such as measures implemented by the company to ensure future tax compliance, when making a decision.

The guidance states that any procurements to which the new policy applies must contain clauses enabling the department to terminate the contract due to an OONC by the supplier as part of their terms and conditions. The contract must also place an obligation on the supplier to keep the department notified of any changes in relation to its tax compliance. Sample clauses are provided as part of the guidance document.