Public sector suppliers “tax-compliant” according to procurement policy review

A Cabinet Office and HMRC review of a tax and procurement policy introduced last year has found that companies bidding for public sector contracts are tax-compliant

In April 2013 a policy was introduced requiring all companies bidding for contracts over £5 million to prove that they have not submitted an incorrect tax return, owing to tax evasion or avoidance, since October 1, 2012. Bidding companies will have to disclose any instances where HMRC has successfully taken action against a company under the general anti-abuse rule (GAAR) or the ‘Halifax abuse’ principle for incorrect tax returns.

According to Out-Law.com, it also includes any occasions where suppliers have been convicted for tax-related offences or handed a penalty for civil fraud or evasion. Any tax avoidance schemes that the supplier engaged in and should have referred to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules must also be disclosed.

A new EU directive requires exclusion from a contract for any supplier that breaches its obligation to pay taxes. However, the new policy seems to have had a positive effect according to the new review.

Out of 65 bids for public sector contracts worth over £5 million since the policy was introduced, only one bidder failed the ‘overriding mandatory procurement test.’ This failure didn't happen because the bidder couldn’t prove they were tax-compliant, but because they were ‘unable to provide and deliver services that would fulfil the procurement department’s contract.’

Overall, the review concluded that bidders were “very mindful of the need to be tax compliant.” Earlier this year international law firm Pinset Masons said that it had only uncovered two instances where bidders for public sector contracts had been involved in tax non-compliance or avoidance. Out of these two cases, one was made in error and the other bid failed to win the contract for reasons other than tax non-compliance.

Tax partner at Pinset Masons, Ian Hyde, said that companies had responded to “public sentiment and political pressure”, and acknowledged that to be tax non-compliant could be hugely damaging to a company’s reputation and business. This is supported by a Financial Times survey published in May about tax policies of companies with large public sector contracts. The results showed that many of these businesses wanted to be perceived as ‘low risk’ as they were subject to particularly close scrutiny as public sector suppliers.

While the current policy stipulates that companies have to disclose any occasions of non-compliance since October 2012, the government had originally wanted suppliers to include all instances of non-compliance during the past ten years. Heather Self, tax expert at Pinsent Masons, said that while some MPs have called for even tougher rules, such a requirement would have been too harsh.

“All government procurement processes must be based on a fair and open criteria,” she said. “A company cannot be barred from the process merely because its tax bill is lower than politicians might like.”

The results of the Cabinet Office review could be interpreted in several ways. While it could imply that many suppliers have made a decision to be more tax-compliant since the policy was introduced in 2013, it could also suggest that non-compliant companies have become more reluctant to bid for public sector contracts.

The policy applies only to contracts worth over £5 million, so there is no guarantee that companies bidding for contracts worth less than this are tax-compliant. It is encouraging, however, to see that public sector suppliers are making efforts to be tax-compliant, and that procurement policies are making an ethical impact.

 

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