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Diversified industrials e-briefing: UK: Procurement – the importance of tax compliance

  • United Kingdom
  • Industrials - Aerospace, defence and security
  • Industrials - Automotive
  • Industrials - Chemicals
  • Industrials - Industrial engineering

28-08-2013

  • New legislation has been introduced that makes tax compliance a condition of the UK Central Government procurement process.
  • Industrial and manufacturing businesses that are involved in or pitch for UK Government contracts that disclose occasions of non-compliance can be excluded from the procurement process or have Government contracts terminated.
  • Although the scope of the new policy is narrow, the long look-back period and the on-going compliance monitoring requirements may give rise to additional administrative burden.
  • The policy also applies to non-UK suppliers and requires a comparative review of local tax provisions against UK tax provisions for certification purposes.
  • However, the new policy operates by self-certification by businesses with no obligation upon the Government to verify the certification given. It remains to be seen how diligently industrial and manufacturing business involved in UK Government contracts will review their tax compliance position in the absence of any prospect of external review or oversight.

In the 2013 Budget, the UK Government announced a new policy that requires potential manufacturing and industrial as well as other businesses which supply Central Government to confirm that they are compliant taxpayers as part of the procurement process, with the possibility of being denied contracts or having contracts terminated for incidences of non-compliance.

The policy has been significantly watered down since its original inception but bidders for contracts with the UK Government, both domestic and overseas, should be aware of these additional requirements for winning and retaining Government contracts. This briefing sets out a summary of the key aspects of this new policy.

Broadly, the new policy applies from 1 April 2013 to all procurement processes under the Public Contracts Regulations 2006 and the Defence and Security Public Contracts Regulations 2011 for public contracts worth over £5 million per year. Under the new policy, potential suppliers will be required to certify in the procurement documentation whether, in respect of the prior 6 years:

  1. their tax returns have given rise to any unspent criminal convictions or to any penalties for civil fraud or evasion;
  2. any tax returns have been found to be incorrect as a result of a challenge under specific general anti-avoidance principles;
  3. any tax returns have been successfully challenged under any tax rules or legislation in any jurisdiction that have an effect equivalent or similar to such specific general anti-avoidance principles;
  4. there has been a failure of an avoidance scheme which the supplier was involved with and which should have been notified under the UK Disclosure of Tax Avoidance Scheme or any equivalent or similar regime in any other jurisdiction.

These occasions of non-compliance have been narrowly drawn and restricted to the most serious issues. The policy is further limited by not requiring disclosure of any non- compliance prior to commencement of the policy (1 April 2013), making the policy of more limited concern at present although of greater significance as time passes. The policy is further limited by there being no requirement to make any certification on behalf of any subcontractor or other member of the supply chain or any member of the supplier’s group.

It is important to note that this policy applies not only to UK taxpayer suppliers, but to overseas suppliers as well. For overseas suppliers, the above occasions of non-compliance need to be considered in the context of comparable local law, making the certification review process for an overseas supplier more complex by requiring a comparative exercise between UK and local tax provisions.

The policy operates on the basis of self-certification by the supplier with no obligation on the relevant Government department to investigate or verify any responses. This is intended to ensure the policy will be relatively easy and cheap to implement, however it does lead to a question over how this policy will be enforced to ensure suppliers undertake an appropriate evaluation of their tax affairs when making the required certification.

If a supplier does disclose any occasion of non-compliance, the relevant Government department can choose, at its discretion, to exclude that supplier from the procurement process. However, potential suppliers are able to provide mitigating factors for the occasion of non-compliance. These might include a change in key personnel as a result of the breach and/or details of any corrective action the supplier has taken to ensure a similar event will not happen in the future. If it can be shown to be an isolated incident, and not a symptom of a bigger problem, this may also serve as a mitigating factor. The aim of this new policy is to encourage tax compliant behaviour in suppliers, not to exclude potential bidders from contracts, so providing compelling mitigating factors along with any certification of non-compliance should ensure that a supplier’s bid is not excluded by reason of such non-compliance. 

The policy will also have forward-looking application to contracts entered into following certification of a supplier’s compliance status. Government departments will be required to include statements within the contractual documentation requiring the chosen supplier to warrant the tax certification given in the procurement process and to undertake to notify the relevant Government department of any future occasion of non-compliance. Breach of these warranties and undertakings will entitle the Government department to terminate the contract. 

In summary, although an additional layer of compliance to the procurement process for Government contracts, the narrow scope should mean that this new policy does not cause significant issues for most potential suppliers. However, overseas based suppliers may well face a higher compliance burden in comparing local tax rules to the relevant UK provisions and the discretionary nature of a Government department’s reaction to the disclosure of any non-compliance could well cause distortion and unfair treatment between suppliers. Further, a chosen supplier will need to consider its on-going contractual obligations to monitor tax-compliance when setting internal tax policy and undertaking tax planning during the life of any Government contract.

The Government has said the new policy will be reviewed within a year and any necessary changes may be made at this stage. The evolution of this policy should be monitored by businesses seeking Government contracts, with one area of particular significance being the reliance on self-certification of compliance. At present, there seems very little incentive or encouragement for a potential supplier to properly consider its tax affairs for the purposes of certifying its compliance position and it will be interesting to see if the Government tightens the rules in this key area.