Out-Law / Your Daily Need-To-Know

No businesses barred from bidding for government contracts due to tax avoidance

Out-Law News | 09 Jun 2014 | 3:11 pm | 2 min. read

No business has been barred from bidding for UK government contracts in the year since new rules were introduced that require the disclosure of the use of tax avoidance schemes by prospective government suppliers.

Research undertaken by Pinsent Masons, the law firm behind Out-Law.com, revealed that just two companies have disclosed their use of tax avoidance schemes or non-compliance with tax obligations since the new rules took effect on 1 April 2013. Neither company was excluded from government procurements.

"One was made in error, and the other failed to win the contract because the company had already failed the bidding process based on criteria other than their record in tax avoidance," Pinsent Masons said.

Since 1 April 2013, businesses bidding for contracts worth more than £5 million and being tendered by central UK government have been under an obligation, as part of the procurement process, to disclose whether they have had any "occasions of [tax] non-compliance" in the past six years, beginning from 1 April 2013 and concerning tax returns submitted on or after 1 October 2012.

Any bidders that have had "occasions of non-compliance" need to provide an "explanatory statement" setting out any mitigating factors. The body awarding the contract has discretion to pass or fail the bidder according to that statement.

Any occasion of non-compliance occurring after a contract has been won, or the discovery of any misleading statements given by the bidder during the selection process, can lead to termination of the contract. 

Pinsent Masons said that data provided by 18 central government departments, including the Cabinet Office, indicates that tax avoidance by major government suppliers may be less of a problem than is perceived.

"The government introduced these new requirements as another tool in its armoury to clamp down on tax avoidance using its purchasing power to deter tax avoidance," tax law expert Ian Hyde of Pinsent Masons said. "There have been concerns raised that businesses who profit from taxpayer-funded projects and services are not paying their fair share of tax back into the public purse. However, this data shows that the popular belief that big businesses are all engaged in systematic abuse of the tax system is actually wide of the mark."

"Companies will balance not wanting to pay more tax than they owe, with the knowledge that the courts are now likely to rule that schemes no longer work anyway. Further, 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. Companies have been quick to respond to public sentiment and political pressure, acknowledging that the potential loss of business which can result is not worth the risk," Hyde said.

"To an extent the agenda for large companies has moved on and companies 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," Hyde said.

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