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Budget: Deloitte comment on public sector procurement rules

21 March 2013

Commenting on new rules on the tax affairs of businesses bidding for public sector work, announced in today’s Budget, Kirsty Garrison, tax partner at Deloitte, the business advisory firm, said:

“On Valentine’s Day the Chief Secretary to the Treasury announced new rules that allow government departments to ban companies and individuals which take part in failed tax avoidance schemes from being awarded Government contracts. We have sympathy with the broad objectives of the policy but the initial draft focussed too much on the past and didn’t encourage good compliance for the future.

“We’re delighted to see that the retrospection has been alleviated, in that firms will only be banned in respect of returns filed from 1 October 2012 and amended from 1 April 2013. There is still scope for past tax planning which has since been unwound to bar now-compliant firms from government contracts, if their tax affairs are under enquiry and not yet been settled - but given that the proposed changes to government procurement were first announced in September, firms have been on notice since then. And the position going forward is clear - avoid tax, and run the risk of losing public sector work.  

“The definition of non-compliance has been clarified, to the benefit of government procurers who have much greater certainty of what to look out for.  

“Other positive changes are the move to only apply the new rules to contracts valued over £5m and confirmation that declarations will only be needed from the bidding entity itself - both changes remove burdensome administration, especially from small and medium enterprises, without watering down the policy objective of encouraging compliant behaviour.”

Ends

Notes to editors

  • On Valentine’s Day, the Chief Secretary to the Treasury, Rt Hon Danny Alexander MP, made a Written Ministerial Statement (WMS). In that statement he issued for comment “a draft of new rules that will allow government departments to ban companies and individuals which take part in failed tax avoidance schemes”. It is intended that the new guidelines will apply to tenders advertised from 1 April 2013. Given the existing legislative framework, detailed below, there is no need for additional law.
  • The legal framework that governs the process under which public sector contracts are awarded is set out in a European Regulation. This is brought into effect in the UK by Statutory Instrument 2006/5 (The Public Contracts Regulations 2006). It includes certain criteria for the rejection of suppliers. SI 2006/5 applies to central government, local government, and various non-governmental public sector bodies. There is a list of several hundred bodies to which it applies set out at the end of the Instrument.  
  • It has always been the case that suppliers convicted of the offences of cheating the Revenue or defrauding Customs are prohibited from winning contracts. Contracting authorities have also always been able to turn down suppliers, at their discretion, who have “not fulfilled obligations relating to the payment of taxes’ or social security in the UK or the EU. Accordingly the draft HMRC guidelines and the PPIN set out how the government believes that the existing law should be interpreted.
  • Suppliers wishing to tender for a public contract are required to complete a pre-qualification questionnaire and it is expected that this will be modified to ask for additional information about tax. Potential suppliers will be required to self-certify whether they have fulfilled their obligations relating to the payment of taxes.  
  • In addition, contracting authorities will be able to include a standard clause in contracts requiring that suppliers notify an OONC that occurs after the contract has started and allowing contracts to be terminated at the public body’s discretion.
  • HMRC’s response to the consultation indicates that an Occasion Of Non Compliance (OONC) occurs if any tax return filed after 1 October 2012 is found to be incorrect (whether as a result of litigation or by agreement with HMRC) under the new General Anti-Abuse Rule that will be introduced for direct taxes in the Finance Act 2013 or equivalent case-law abuse principle for indirect taxes.   
  • An OONC also occurs if a scheme notified, or that should have been notified, under DOTAS is proved to have failed. There is currently no guidance on when a scheme is deemed to have failed where it is being litigated and is under appeal.
  • An OONC also occurs if the supplier has a conviction for tax-related offences, or has incurred a penalty for civil fraud or evasion. There is currently no guidance on which penalties might constitute civil fraud or evasion, which is not a defined term.
  • The first draft of the HMRC guidance and the PPIN included a ten year look back period such that suppliers bidding for contracts in 2013 would have been required to consider OONCs dating back to 2003. This has been amended so that the rules will only apply to OONCs occurring after 1 April 2013 in respect of returns filed after 1 October 2012.  
  • Suppliers reporting an OONC will be invited to provide an explanation. If they do not provide an explanation then they will automatically fail the tender process. If they do provide an explanation then they could pass, depending on whether their explanation is deemed acceptable. Mitigating factors include changes in management, changes to their tax practices, the scale of the OONC and where HMRC do not consider the supplier to be high risk.
  • All HMRC-administered taxes are covered. Foreign suppliers will be required to certify OONCs in relation to equivalent foreign tax rules. Similarly, certifications in respect of joint ventures will need to be made in respect of all parties to the consortium although subcontractors will not be required to certify.       

About Deloitte
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities.

Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

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