UK: Procuring An End To Tax Avoidance?

On and from 1 April 2013 public procurement procedures will be enlisted by government as part of its suite of measures to combat tax avoidance. The new rule is based on Public Contracts Regulations 2006, reg 23(4) which allows a contracting authority to treat a bidder as ineligible or to decide not to select a bidder if it has not "fulfilled obligations relating to the payment of taxes under the law of the any part of the United Kingdom or any relevant state in which the economic operator is established".

Bidders for all central government contracts over £5 million must certify that they have had no "occasions of non-compliance" with tax rules during the relevant "look-back period": If incorrect or misleading statements come to light at a later stage then the bidder may be excluded from further participation and any contract that has been awarded may (at the contracting authority's discretion) be terminated.

Self-certification requirements apply to:

• the "economic operator" who will fulfil the contract, and
• where the economic operator is part of a joint venture or consortium, self-certification must cover all members

Where the economic operator is a partnership, limited partnership or limited liability partnership (LLP) self-certification relates to the partnership, limited partnership or LLP but not the individual members.

An economic operator that is a member of a group is not required to certify on behalf of other members of that group.

Despite initial proposals that the "look-back period" was to be a fully retrospective 10 years before 1 April 2013, the government confirmed on budget day that the new rules apply only to tax returns submitted on or after 1 October 2012. Going forward, the maximum extent of the "look-back period" has been set at six years.

The rule applies to all central government departments, their executive agencies and Non-departmental Public Bodies. All other public authorities will be entitled, and encouraged, to impose similar requirements.

What is an "occasion of non-compliance"?

An occasion of non-compliance occurs if any tax return is found to be incorrect as a result of HMRC successfully taking action under:

• the General Anti-Abuse Rule (GAAR) to be enacted in Finance Bill 2013, or
• the "Halifax abuse" principle¹

This retreats from the government's original proposals, which also included non-compliance under any of the Targeted Anti-Avoidance Rules (TAARs) found throughout the tax regime.

There is also an occasion of non-compliance if a tax return is found to be incorrect due to non-disclosure of a scheme falling within the Disclosure of Tax Avoidance Scheme (DOTAS) rules, or if a taxpayer has been convicted for tax-related offences or liable to penalties for civil fraud or evasion.

Crucially, non-compliance does not require a formal court or tribunal ruling. Amendment of a tax return by agreement with HMRC would also constitute an "occasion of noncompliance". Although far less of an issue than under the original, more extensive, proposals, this may have the unintended consequence of promoting litigation rather than settlement of tax disputes where a taxpayer's business depends to any significant extent on central government contracts. Settlement would mean an inevitable "occasion of non-compliance". Litigation, with even a marginal chance of success, might therefore be considered a necessary risk.

Pass or fail – automatic disqualification?

Suppliers will be asked to self-certify their tax compliance. The response is likely to be marked on a straight "pass/fail" basis. It does not follow that a "fail" would result automatically or inevitably in exclusion. The contracting authority is intended to have discretion, allowing it to take into account the magnitude or seriousness of the "occasion of non-compliance". However, it may be difficult for a disappointed bidder to challenge exclusion justified by reference to a "fail" unless it could demonstrate that other bids with similar characteristics have been allowed to continue despite having a similar "fail" mark. Further, given the potential complexity of differentiating between the seriousness of occasions of non-compliance, there may be a tendency on the part of contracting authorities to lean towards exclusion rather than exercising discretion in favour of bidders with a "fail" mark.

To mitigate that risk, the government has stressed that bidders should be given an opportunity to show how they have "taken steps to prevent further occurrences happening, and thereby satisfy government that they will be compliant in the future". However, that comfort is likely to apply only in relation to historic breaches. It is unclear how far, or over what period, bidders will have to demonstrate improved behaviour to wash away the risk of disqualification.

Foreign suppliers

Difficult issues may also arise where non-UK suppliers, or UK suppliers with foreign tax obligations, bid for central government contracts. Those suppliers must certify that there has not been an occasion of non-compliance "in relation to the equivalent foreign tax rules, where these exist".

Explaining its decision, the government said that tax regimes do not need to be identical in order for the measure to be consistent with EU Treaty principles of fairness and proportionality. While some may be less strict than the UK, others may be more so.

There remains no further guidance as to what might amount to an equivalent foreign tax rule. Consequently, there may be scope for complaint – though probably not straightforward grounds for legal challenge – where a disappointed bidder can point to lax tax rules or practices in a jurisdiction that allow a rival bidder either to secure a "pass" mark or to state that the question does not apply to them because there are no "equivalent" rules in the relevant jurisdiction.

Identifying the economic operator

In revising its proposals the government addressed concerns that requiring certification in relation to entities other than the bidder itself would be "impracticable, expensive and high-risk".

The government acknowledged that any solution looking beyond the bidding entity "would necessitate complex rules to define a relevant subset of entities and this would be hard for suppliers and government departments to accommodate". Consequently, as implemented, the rules do not require certification on behalf of:

• any subcontractor or any other members of the supply chain, or
• any group company of the bidder falling outside the scope of the "economic operator" identified in accordance with case law under the Public Contracts Regulations 2006.

However, this element remains under close scrutiny. The government will review the policy within a year to ensure that it works as intended and may, if necessary, make changes in the light of bidders' behaviour.

In that review, particular attention will focus on the use of "special purpose vehicles" (SPVs). The government acknowledges that "there are occasions where suppliers may, for sound commercial reasons, choose to contract through a newly formed company" such as an SPV. However, should it prove that bidders are widely using SPVs or other corporate structures "solely to avoid declaring occasions of non-compliance" then the rules would be tightened. The government is serious about using the procurement process as leverage for tax compliance and "ultimately, the policy is about behaviour change".

Footnote

1 Stemming from the ECJ ruling in Halifax v Customs and Excise C-255/02 (February 2006)

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