HMRC relaxes bidding rules for tax-avoiding contractors

The government’s plans to ban companies with a history of tax avoidance from bidding for Whitehall contracts have been dropped, after Budget 2013 conceded that the rules should apply prospectively, rather than retrospectively.

Making the climb-down in a document published next to the Treasury’s Red Book, the taxman admitted that “looking at behaviour that predates the policy” would not achieve the aim of changing the future tax conduct of Whitehall’s contractors.

As a result, companies eyeing contracts of £5m or more will only have to self-certify where an ‘occasion of non-compliance’ with tax occurs on or after April 1st 2013, and in respect of tax returns submitted on or after October 1st 2012.

Having attracted criticism for being impractical, the original proposal stating that would-be contractors had to go back 10 years into their records to identify such an event has been shortened to a ‘look-back’ period of six years.

Agreeing that a decade was too long, HMRC says it could have even included “‘occasions of non compliance’ as early as 2003, which may theoretically bring in long running cases where a transaction was entered into as early as the 1980s.”

Much to the applause of business groups such as the CBI, and their advisors such as KPMG, HMRC now states that aspiring suppliers to Whitehall will only have to keep track of future occasions of tax non-compliance.

The change of heart from the Revenue accompanies more clarity about the definition of a “supplier,” which will follow procurement law and apply to the ‘economic operator’, not the worldwide group.

Law firm Pinsent Masons reflects that in practice, most contracting authorities regard the ‘economic operator’ as the being the bidding entity, plus any entity providing technical (or financial) assistance.

So “significant subcontractors” will still need to certify their position in terms of tax compliance but independently from the main contractor, said the firm’s Jason Collins.

“This still leaves risk because each has no control over whether the other party will breach the measure during the contract, leaving the contract open to termination,” he said. “The same goes for companies which form a joint-venture to bid for a contract.”

HMRC confirmed: “Where the economic operator is a joint venture or consortium, the self-certification must cover all members; [but] the economic operator is not required to certify on behalf of any subcontractor or any other members of the supply chain.”

Addressing such subcontractors, the department added: “Where the economic operator is a partnership, limited partnership or limited-liability partnership (LLP), the self-certification covers that partnership, limited partnership or LLP but not the individual members.”

Meanwhile, the Revenue says the procurement rules have been narrowed to tax schemes caught by the General Anti-Abuse Rule and the Disclosure of Tax Avoidance Schemes regime, rather than the many ‘targeted anti-avoidance rules,’ as the initial framework proposed.

It follows that an event of ‘non-compliance’ occurs where a company has to amend its tax return due to the application of the GAAR; the entering into of a scheme caught or potentially caught by DOTAS, or the Halifax Abuse principle (relevant for VAT) or a conviction for tax evasion.

“Overall, the new rules are much more proportionate and easier for bidders to manage,” said Mr Collins of Pinsent Masons.

“However, protest groups might argue that, by restricting it to new planning, HMRC has potentially missed an opportunity to leverage bidders to settle existing planning and pay more tax.  

“This could prove embarrassing for the government if a supplier on a major contract loses a high profile Court case, or discloses a major settlement, in the future.  Will the public understand that the planning pre-dated the measure but was only settled after it?”

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