TAX PLANNING AND TAX AVOIDANCE
Contents:
Scope
Key Points
Background
Planning
Procurement
Harmful Tax Competition
Public Private Partnerships
Transfer of Real Estate and Other Capital Assets
Further Advice
Purpose
1. This section gives guidance on the use of external tax advisers and the consideration of tax liabilities in relation to procurement decisions. The guidance is aimed primarily at the constituent parts of the Scottish Administration (i.e. the core Scottish Government (SG), SG Executive Agencies and non-ministerial Executive Agencies / Departments). However, it should also be considered applicable to bodies sponsored by the SG and should be taken into consideration by other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable.
Key Points
2. External tax advisers, or schemes marketed by such advisers, should not be used with the primary objective of reducing tax liabilities. Proposals to employ external tax advisers must be approved by the relevant portfolio Finance Team.
3. Public procurement decisions should be based on the need to secure value for money - independent of the tax advantages for individual bodies that may arise from a particular bid.
4. Restrictions on bidders should be considered where they are justified in terms of the objectives of the project and consistent with international obligations and government objectives on tax transparency and openness.
Background
5. The activities of government and public bodies frequently give rise to tax liabilities; either directly on their own account or through contracts with other bodies where the tax system influences the terms of those contracts. In making an assessment of cost effectiveness in activities where tax considerations might be important, it should be borne in mind that savings arising from tax mitigation may arise at the expense of other taxpayers, or other parts of the public sector.
Planning
6. Aggressive tax management in the public sector would be inconsistent with attempts to discourage tax avoidance and evasion in the private sector. External tax advisers, or schemes marketed by such advisers, should not therefore be used with the primary objective of reducing tax liabilities. However, external advisers may have a legitimate role to play where insufficient expertise exists in-house eg in managing statutory PAYE requirements, or in complex commercial contracts such as public private partnership schemes. Proposals by constituent parts of the Scottish Administration or bodies sponsored by the SG to employ external tax advisers must be approved by the relevant portfolio Finance Team.
Procurement
7. Public procurement decisions can give rise to a number of issues relating to tax planning. Consistent with the need to ensure fair and transparent procurement processes in line with legal obligations, decisions should be based on the need to secure value for money - independent of the tax advantages for individual bodies that may arise from a successful bid from an offshore company, or from complex or artificial tax arrangements which have no underpinning economic basis.
8. Restrictions on bidders should be considered where they are justified in terms of the objectives of the project and consistent with international obligations and government objectives on tax transparency and openness. In considering applying restrictions of this nature, Accountable Officers should seek legal advice, and would need to consider whether they were consistent with the overriding obligation to obtain value for money in all procurement, taking account of propriety and regularity and the duty of Best Value.
9. The grounds for exclusion of bidders are very limited. Under regulation 14(g) of the Public Supply Contracts Regulations 1995 (there is parallel provision in the other Regulations), bidders should be excluded if they have "not fulfilled obligations relating to the payment of taxes under the law of the United Kingdom or the State in which the supplier is established". It would however be possible to make it a contract condition (notified in advance when advertising the contract) that the successful bidder will be prohibited from using particular tax arrangements, including offshore tax havens, provided such a restriction would not in fact be directly or indirectly discriminatory between bidders. Legal and specialist procurement advice should be obtained on a case by case basis.
10. Accountable Officers should pay particular attention to transactions which might give rise to concerns about the propriety of tax arrangements, and should set internal management processes which ensure that such transactions are brought to their attention, and if necessary to the attention of Ministers.
Harmful Tax Competition
11. Particular care should be taken with transactions involving bodies with tax residence in offshore financial centres, or which involve tax arrangements that the UK government regards as harmful tax competition. When considering a range of bids for contracts there must be confidence that those bids are sustainable and robust over the long term. Where those bids are derived in part from the use of tax regimes that are the subject of UK or international pressure for reform, there may be higher levels of tax risk involved which should be considered in deciding whether such bids are sustainable in this way.
Public Private Partnerships
12. In the case of public private partnerships it is particularly important to ensure that comparisons of competing bids take account of any tax planning by bidders.
Transfer of Real Estate and Other Capital Assets
13. Public procurement projects involving the transfer of real estate or assets that are likely to appreciate in value can often give rise to specific tax issues, in particular the liability to capital gains tax. If public sector organisations are negotiating with bodies that wish to structure procurement proposals in this way, they should consult the SG Finance Directorate and HM Revenue and Customs at an early stage to identify the likely tax implications and assess the proposal for propriety generally.
Further Advice
14. Business areas within the Scottish Administration can obtain further advice from the Accountancy Services Team (in relation to income tax), the Treasury and Banking Team (in relation to VAT) and the Procurement Directorate (in relation to procurement policy). Bodies outwith the Scottish Administration should address enquiries relating to income tax and VAT directly to HM Revenue and Customs.
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Page Published / Updated: July 2009