The Procurement Act 2023 came into force on 24 February 2025. As with the regime the Act replaces, suppliers to the UK government risk being excluded from public tender processes if mandatory or discretionary exclusion criteria apply. The exclusion and disbarment rules are covered in more detail here.
The scope of tax compliance issues that may lead to exclusion are significantly expanded by the Act, to capture “deliberate” tax penalties (even those already incurred within a look back period) not just of suppliers but also associated persons, intended subcontractors and their connected persons. Suppliers’ tax and procurement teams therefore need to be checking their own tax compliance, as well that of these other categories of persons, to ensure they are not excluded from participating in tender processes.
Deliberate tax penalties
A new mandatory exclusion ground under the Act arises where a supplier, an associated person, intended subcontractor or their connected persons has been assessed to a “deliberate” penalty for two types of tax misconduct:
- errors in tax documentation, such as an error in a corporation tax return, or
- a failure to notify, such as a Pillar 2 filing member failing to register for domestic top-up tax.
This ground also applies if a supplier, associated person, intended subcontractor or their connected person has suffered an equivalent penalty outside of the UK. There is a five-year look back period for deliberate penalties, albeit restricted to three years for penalties incurred before the Act came into force.
A “deliberate” penalty may be assessed where HMRC conclude that the taxpayer knowingly provided a document containing an error to HMRC or failed to notify HMRC when it should have done, with the subjective intention to thereby mislead HMRC (i.e. that HMRC should rely on that document or non-notification as accurate). This is a lower standard than criminal fraud but, although the bar is still set fairly high, we have increasingly seen HMRC assert that corporate groups have acted “deliberately” where historically the behaviour in question might have been assessed to be merely “careless”.
Significantly, a supplier may be excluded if the exclusion ground applies to either the supplier, an associated person, or a connected person of the supplier.
As further described in our blog post here:
- “associated person” covers anyone the supplier is relying on to satisfy the conditions of participation, other than a guarantor; and
- “connected person” includes a parent or subsidiary, a director, and anyone who exercises significant control over the supplier, including individuals with at least a 25% direct or indirect shareholding or voting interest in the supplier, or who has direct or indirect majority director appointment rights.
A supplier could also be excluded on the basis that any subcontractors it intends to use for the tender, even if they do not amount to an “associated person”, is an excluded or excludable entity, unless it replaces the subcontractor during the competitive tendering procedure. This also extends to a connected person of a subcontractor.
Examples of where the ground could apply include:
- An M&A target is assessed to a deliberate penalty after it joins a corporate group for behaviour that occurred before it joined the group;
- An overseas subsidiary is assessed to an equivalent penalty outside of the UK;
- A director or “significant controller” of the supplier is assessed to a deliberate tax penalty in connection with their personal tax affairs; and
- A subcontractor or their connected person is assessed to a deliberate penalty and the supplier cannot ‘self-clean’ or replace that subcontractor.
While the Act focuses on eligibility for new tender processes, existing contracts with contracting authorities may already give the authority a termination right for certain “occasions of tax non-compliance”, including deliberate penalties, if those contracts comply with the previous guidance in this area (a Cabinet Office action note from 2014).
What other tax issues are covered?
Other tax-related mandatory exclusion grounds generally relate to criminal conduct, such as fraudulent evasion of tax and cheating the public revenue.
However, the Act also adds new mandatory exclusion grounds where:
- suppliers, associated persons and connected persons have been ‘defeated’ in connection with tax avoidance arrangements covered by ‘DOTAS’, or have entered into arrangements that have been counteracted by the GAAR. This is perhaps most relevant to individuals who are “connected persons”;
- a supplier, associated person or a connected person has been liable to a penalty for:
- transactions connected with VAT fraud under section 69C of the Value Added Tax Act 1994 or
- evasion of tax or duty under section 35 of the Finance Act 2003.
What should suppliers be doing?
Participation in many tenders will require suppliers to “self-declare” whether any mandatory exclusion grounds apply to them, their connected and associated persons, so there are some points suppliers need to be checking now, as well as seeking to maintain their eligibility for tender processes going forwards. Although none of the discretionary exclusion grounds are directly concerned with tax matters, some of them (such as the ground concerning professional misconduct) are broad enough to potentially cover tax issues, so these grounds should be considered by suppliers in relation to tax as well.
Suppliers should be:
- Making sure procedures are in place for the tax team to engage with the procurement team at an early stage if any tax-related mandatory exclusion grounds may be relevant;
- Checking whether they, their “associated persons”, intended subcontractors or any of their “connected persons” have been assessed to a deliberate tax penalty in the 3 years before the Act came into force, including any equivalent penalties outside the UK, or have been involved in any ‘DOTAS’ or GAAR-counteracted arrangements;
- Developing contractual protection for the future, such as by including relevant representations on tax compliance and information-gathering rights in agreements with subcontractors and associated persons;
- Keeping tax audits, enquiries and litigation under review worldwide for any deliberate penalties or non-UK equivalents;
- Ensuring that no assessment to a deliberate penalty in the UK or elsewhere is accepted or conceded as part of a settlement without first checking with the procurement team;
- Prepared to explain why any deliberate penalty within the look-back period was a ‘one-off’ – the supplier may not be excluded if the contracting or authority considers that the circumstances giving rise to the exclusion ground have ceased or are unlikely to reoccur; and
- Discussing the tax mandatory exclusion grounds with directors and subcontractors, and checking rights to obtain relevant information from them.
Suppliers should also be aware that the Act permits an investigation by the appropriate authority into the application of mandatory exclusion grounds to the supplier to consider whether a supplier should be added to the debarment list of excluded suppliers, and that Ministers have powers to compel a supplier to produce “relevant documents” for the purposes of that investigation. This means suppliers entering competitive tendering processes should aim to have relevant information on tax exclusion grounds to hand before entering those processes, and ensuring document retention policies permit the retention of relevant information.
