Lawyers provide initial reaction to Treasury plans on tax avoidance
Immediate issues of concern are proportionality, the 10-year time limit and personnel changes
Lawyers scrutinising HM Treasury plans on tax avoidance have advised that further clarity is required before the proposals move to legislation.
Although the measures appear to comply with EU procurement rules, there may be questions around proportionality and many suppliers will fail to comply with the new rules on a prima facie basis, according to Jason Collins, Head of Tax at Pinsent Masons.
The advice follows yesterday's announcement that the government is due to permit central government departments to ban suppliers involved in failed tax avoidance schemes from being awarded government contracts worth £2m or over.
It is currently proposed that the changes, which are due to come into effect in just over six weeks from 1 April 2013, will include a historical time limit of 10 years beyond which earlier non-compliance events are disregarded.
Collins said, "The measure is broadly fine. However, there might be questions around proportionality. Sectors with large partnerships- such as the big four accounting firms- have partners who may have been engaged in some form of tax avoidance, but does that preclude the whole firm from working for government? The application of specific points might be open to legal challenge."
Collins explained that the 10-year time limit may throw up some specific legal issues.
He said, "Looking over the last 10 years, suppliers might have settled previous disputes with HMRC (HM Revenue & Customs).They may feel that they settled that dispute in good faith, but if they'd known a subsequent measure would be introduced barring them from government work, they would have taken it to court and challenged it."
However, according to a Treasury spokeswoman, organisations in this particular position, who have previously settled with HMRC over tax avoidance cases, will not be automatically barred from bidding and potentially gaining contracts. She said, "They have to self-certify, but they wouldn't be caught by the criteria."
Collins also pointed out provisions within the rules which suggest that, even if suppliers initially fail the test, there may be aggravating or mitigating factors that can be taken into account.
He added, "These mitigating factors could mean that, although suppliers may have had 'non-compliance' events in the last 10 years, provided they can demonstrate that they are not engaged in tax avoidance today and do not plan to be, they should still get government work, though it is of course down to the Cabinet Office and the department running the bid. However, we need more clarity as to whether 'Damascene conversions' might be enough to bring you over the line."
Collins said, "As long as they can show that they are not engaged and will not be engaged in tax avoidance- that the leopard has changed its spots- then they should be waved through. However, for companies who have been involved in tax avoidance and are still doing it, this will be bad news for them."
Regarding the 1 April deadline, he said, "This is one of the big challenges for suppliers: getting all the information you need for the last 10 years ready by then. Most big corporates will know whether they've had a non-compliance event in the last 10 years. However, those who have had a change in tax management or a new head of tax in recent months may find it more challenging. That's where the 10 year limit really bites."
However, Collins explained that this may not necessarily be as serious a barrier as it seems. He said, "If you win the contract and it transpires you didn't tell the department about a previous event, you'd only be booted out if you can prove it was a fraudulent claim. If it was an honest mistake, there should be provision for that."
However, responding to this point, a Treasury spokesperson said, "It is up to companies to make sure they self-certify correctly. Personnel changes are not a reasonable excuse, and they wouldn't be in any other forum."