HMRC intends to relax its tax avoidance rules for contractors seeking public sector contracts.

Monday 25 March 2013

HMRC has announced that plans to relax the rules which effectively ban companies with a history of tax avoidance from taking public sector contracts.

In its written response to an informal consultation on the subject taken last month, HMRC announced that it now plans to apply the rule prospectively rather than retrospectively.

This means that companies will only have to self-certify an ‘occasion of non-compliance’ with tax rules if it occurs after the start of the new financial year next month, or regarding a tax return submitted on or after October 1st 2012. Instead of looking back over the past ten years to judge a contractor’s compliance, HMRC will instead institute a ‘look-back period’ of six years from 2019.

In 12 months time the government intends to revisit and review the policy to make sure it is working effectively and determine whether any further changes need to be made.

HMRC’s response, published to accompany the Budget last week, said that some respondents had been concerned ten years was far too long. In theory, looking back as far as 2003 would have brought into question contracts that were originally agreed in the 1980s.

The taxman acknowledged that there has been a sea of change in conduct for many companies in that period, while dealing with a very different business culture would not achieve HMRC’s goal of improving the financial conduct of prospective contractors in the future.

Indeed, many contractors will be spared self-certification anyway since the rules will now only apply to larger contracts. Fears were raised during the consultation that creating additional pressure on small businesses may put them off bidding for public sector work. As a result, only contracts of £5 million or more will be subject to the new regulations.

No department is obliged to publish a written reply to an informal consultation, but HMRC said that they felt the size of the response they had received merited an answer.

More than fifty representations were made from stakeholders including law firms, representative bodies, accountants and suppliers.

Those viewpoints have contributed to several wide-ranging changes to the policy. Following uncertainty over how foreign companies would be judged on their compliance with different tax systems, HMRC decided contractors from other countries would have to self-certify their compliance against the equivalent tax rules in those states where they existed.

Other respondents had raised concerns that the new rule would put would-be contractors off settling tax disputes out of fear of losing out on lucrative contracts. However, since one of the main reasons for this was felt to be the length of the ‘look-back’ period, HMRC expects that changes to that policy will minimise this risk as well.

EU law also features heavily in the consultation. Respondents had pointed out that the definition of non-compliance outlined in the new policy might contradict the European Procurement Directive as well as the UK’s own Public Contracts Regulations 2006. However, HMRC has reviewed the wording of the bill and concluded that none of these regulations breaches any of the others.

The final version of the guidance has not yet been published, but is expected in the next few months.


By Victoria McDonnell

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