New rules use government buying power against tax avoidance. The government is proposing new rules that will ban companies and individuals which take part in failed tax avoidance schemes from being awarded Government contracts.

The measures were unveiled by Chief Secretary to the Treasury, Danny Alexander and Minister for the Cabinet Office, Francis Maude today. 

  • From 1 April 2013 potential suppliers to central government will have to self-certify, as part of the selection stage of above-threshold procurements, their recent tax compliance history.
  • Additionally new contracts will contain a standard clause enabling government to end a contract if a supplier has had an ‘occasion of non-compliance’.

Suppliers with tax obligations in foreign jurisdictions will be required to certify that there has not been an ‘occasion of non compliance’ in relation to the equivalent foreign tax rules.

Editorial Comment

This may sound like a good idea, and will certainly get public support but it is going to be extraordinarily difficult to apply because there are so many different contracts within the public sector.

For example, people may remember that back in 2001 HMRC and the Valuation Agency sold their properties off to Bermuda based Mapeley and then leased them back under PFI contracts. The deal has been described as poor value for the taxpayer and HMRC has been continually criticised for its lack of savvy in agreeing a deal apparently structured to avoid Stamp Duty which also takes advantage of using intra-group charges to pay low tax internationally. It looks like the Mapeley contract cannot be touched by the new proposals which apply to new contacts, but in the future a body like HMRC will now be able to terminate a Mapeley type contract if the tax planning behind is found to be abusive.

Roll on to 2012 when it was revealed that the BBC and several other public bodies were engaging senior workers via personal service companies, a practice that should theoretically be reduced by changes to IR35 designed to catch directors and other controlling persons within a public body. Anyone who is failing to apply IR35 which is a piece of targeted anti-avoidance legislation will be affected on new contracts.

What is seldom mentioned in the press is that government departments are outsourcing all sorts of contracts to companies who are using thousands of small contractors who have all set up all sorts of schemes and offshore structures. Tax schemes for contractors is big business these days. 

Further data on the proposals

An occasion of non-compliance occurs if:

  • Any tax return is found to be incorrect as a consequence of HMRC successfully taking action:
    • under the General Anti-Abuse Rule (GAAR) to be enacted in Finance Bill 2013; or
    • under any targeted anti-avoidance rule (TAAR); or
    • under the “Halifax abuse” principle; or
  • Any tax return is found to be incorrect because a scheme which the supplier was involved in, and which was , or should have been, notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, has proved to have failed; or  
  • The supplier’s tax affairs have given rise to a conviction for tax related offences or to a penalty for civil fraud or evasion.  

Examples of “ occasions of non-compliance” include:

• A group uses a loan relationship scheme that is disclosed under DOTAS and shown later not to work in the first tier tribunal (FTT). 

• A financial organisation acquired new assets using a complex set of transactions designed to reduce the VAT cost. The Court decided the structure was ineffective due to the application of “Halifax abuse”. 

• A company entered into transactions with related companies to exchange equity for new debt. The Court found that a main purpose of the transactions was the tax advantage and the relevant TAAR disallowed the payments made by the company in relation to the debt. 

• This new policy will apply to all central government above-threshold contracts3 advertised from 1 April 2013.

• The intention is that this will apply to all central Government departments, their executive agencies and Non-Departmental Public Bodies. It could also be used by any public body or public service provider, and they will encouraged to look at the practicality of applying this guidance.