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The government has announced new rules that will not only allow departments to ban suppliers from bidding for public sector contracts if they are found to be guilty of tax avoidance, but to also cancel contracts if a supplier tries to avoid tax after being signed up for work.

The measures come after many suppliers were shown to been paying little or no corporation tax in recent years. Conservative MP Charlie Elphicke claimed recently IT suppliers Oracle, Xerox, Dell, CSC and Symantec as some of the worst offenders. The IT suppliers insist, however, that all of their tax affairs comply with UK law.

Chief secretary to the Treasury, Danny Alexander, and Minister for the Cabinet Office, Francis Maude, today unveiled the measures, which are due to come into effect on April 1, after the draft guidance undergoes consultation by the government.

Tax compliance history

The rules require potential suppliers to notify contracting departments of their recent tax compliance history, and to specifically tell the department if any tax return has recently been found to be incorrect as a result of:

• HMRC successfully challenging it, included under the General Anti-Abuse Rule;
• A failed avoidance scheme which the supplier was involved in and which was, or should have been, notified under the Disclosure of Tax Avoidance Scheme rules.

Suppliers will also be required to disclose if they have been convicted for tax related offences or have been subject to a penalty for civil fraud or evasion. Departments will be able to disqualify any bidder meeting these criteria from the procurement process.

HMRC clamp down

Once introduced, departments will also be able to include a new clause in contracts that allows them to terminate an agreement if a supplier subsequently breaches the new tax compliance obligations. Suppliers will be legally obliged to tell the contracting department if their status changes after the award of the contract.

"The government is clear that aggressive tax avoidance is totally unacceptable. That’s why we are closing loopholes, bringing in a new General Anti-Abuse rule, and investing hundreds of millions of pounds in additional funding to help HMRC clamp down,” said Alexander.

“These new rules are another significant tool as they will enable government departments to say no to firms bidding for government contracts where they have been involved in failed tax avoidance.”