Contractors' Questions: Will state contracts be off-limits to tax avoiders?

Contractor’s Question:  What is the government’s proposed ban on government contracts for large contractor companies who avoid tax likely to mean or entail, in practice?

Expert’s Answer: Firstly, even if the potential contractor has committed a tax offence, there are a number of mitigating factors which may allow the contractor to qualify for the contract. These are set in Policy Procurement Information Notice – Promoting Tax Compliance and Procurement.

The paper, issued earlier this month, suggests that companies that have been involved in ‘tax avoidance’ schemes should not be allowed to apply for government contracts.

While this sounds reasonable, we fear it raises some serious concerns for UK businesses.

Under the proposals the company would have to certify that it is not, and has not over the past 10 years, been involved in tax avoidance that resulted in an incorrect tax return being submitted.

This could be problematic for two main reasons: 

1. It’s potentially disproportionate

The proposals do not appear to draw a distinction between the ‘gravity’ of the tax avoidance undertaken, in particular the amounts involved, the nature and of the tax avoidance undertaken and the regularity of such arrangements being successfully challenged. Ten years could be a long time where companies have ceased to be involved with such schemes – in other words a recognition that there has been a real behavioural change 

2. It could have an unfair impact on the UK

The impact on UK companies could be disproportionate, because it’s likely to be easier to assess whether they have fallen foul of the UK rules, than whether companies from outside the UK have fallen foul of local tax laws (which may, in any case, be different). If this leads to companies outside the UK picking up government contracts, this could affect UK growth.

HM Revenue & Customs is asking for replies to this consultation, launched on February 14, in just two weeks (Feb 28). This is not in line with the government’s best practice guidelines, and rather hurried. We imagine this may be to allow this policy to be launched at the Budget next month.  

The Expert’s Answer is based on the blog comments of Michael Izza, president of the Institute of Chartered Accountants in England and Wales

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