Tax planning and tax avoidance
1. This section gives guidance on tax planning arrangements. It also gives guidance on tax related issues that may arise in the context of procurement. The guidance is aimed primarily at the constituent parts of the Scottish Administration (i.e. the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments) and bodies sponsored by the SG. However, it should also be taken into consideration by other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable.
2. All individuals who would qualify as employees for tax purposes must be paid through the payroll system with tax deducted at source. The SG Finance Directorate must be consulted before any payment arrangements are put in place that could be perceived, reasonably, as seeking to minimise the tax liability of either the individual or the paying organisation concerned.
3. Public sector organisations should, as a general rule, avoid tax management arrangements that have the primary objective of reducing tax liabilities. Proposals to put in place non-standard tax management arrangements must be approved in advance by the SG Finance Directorate.
4. SG Finance Directorate approval should be obtained before employing external tax advisers or using schemes marketed by such advisers.
5. Public procurement decisions should be based on the need to secure value for money - independent of any tax advantages for individuals or bodies that may arise from a particular bid or from complex or artificial tax arrangements which have no underpinning economic basis.
6. 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. (see paragraph 12).
7. 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.
Payment of individuals
8. All individuals - including chairs and board members - who would qualify as employees for tax purposes must be paid through the payroll system with tax deducted at source. The SG Finance Directorate must be consulted before any payment arrangements are put in place that could be perceived, reasonably, as seeking to minimise the tax liability of either the individual or the paying organisation concerned. There is a presumption against such arrangements which could only be justified in the most exceptional circumstances and with the agreement of the Scottish Ministers.
9. Aggressive tax management in the public sector would be inconsistent with attempts to discourage tax avoidance and evasion in the private sector. Public sector organisations should therefore, as a general rule, avoid tax management arrangements that have the primary objective of reducing tax liabilities. Proposals to put in place non-standard tax management arrangements should always be regarded as novel and/or contentious and must be approved in advance by the SG Finance Directorate. SG Finance Directorate approval should also be obtained before employing external tax advisers or using schemes marketed by such advisers. External advisers may however have a legitimate role to play where insufficient expertise exists in-house e.g. in managing statutory PAYE requirements, or in complex commercial contracts such as public private partnership schemes.
10. 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 any tax advantages for individual bodies that may arise from a particular bid or from complex or artificial tax arrangements which have no underpinning economic basis.
11. 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 legal advice should be sought. Consideration would also need to be given to whether the restrictions 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.
12. The grounds for exclusion of bidders are very limited. Under regulation 58(3)(a) of the Public Contracts (Scotland) Regulations 2015, bidders must be excluded (but for the exceptions to this rule described at regulation 58(5) and 58(7)) from participation in a procurement procedure where the public body is aware the bidder "is in breach of its obligations relating to the payment of taxes or social security contributions and this has been established by a judicial or administrative decision having final and binding effect in accordance with the legal provisions of the country in which it is established or in accordance with those of any of the jurisdictions of the United Kingdom". There is a parallel exclusion in the other Regulations covering Concessions and Utilities contracts and also a similar, but discretional, exclusion in the Procurement (Scotland) Regulations 2016".
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.
13. Also, the UK intermediaries tax legislation (known as IR35) can apply to interim or temporary staff working in the Scottish public sector through an intermediary company - often a Personal Service Company (PSC). The nature of individual engagements determines whether the IR35 rules apply. Where they apply, individuals operating under a PSC must pay employment taxes (see Scottish Procurement Policy Note (SPPN) 02/2017) in a similar way to employees. These individuals may be brought in either directly, or indirectly through a third party, most notably a recruitment agency. For direct engagements the effect of IR35 is that individuals in scope must be paid through a public body’s payroll system with employment taxes deducted at source. For individuals brought in through a Recruitment Agency that Agency is responsible for deducting those taxes. The IR35 rules apply to public bodies in Scotland defined by the Freedom of Information (Scotland) Act 2002.
14. The following clause covers cases where IR35 may apply to a PSC and is used in mini-competitions under contractual arrangements that the Scottish Government may have in place at any given time to secure the services of temporary and interim staff: “where IR35 applies, payment of the price will be treated accordingly and the Service Provider shall not be able to claim payment of any sums deducted by the Authority pursuant to its obligations”. A similar clause may also be used in individual adverts for bringing in temporary and interim staff to fulfil engagements but legal and specialist procurement advice should always be obtained first and on a case by case basis. Where non-Scottish Government led Framework Agreements are being used to engage temporary or interim staff these should also be checked to determine whether they include a similar clause which identifies whether IR35 might apply. Public bodies will also want to assess engagements where a PSC might be provided by a Service Provider (e.g. an IT managed service) under a services contract.
15. Particular attention should be paid to transactions which might give rise to concerns about the propriety of tax arrangements. The approval of the SG Finance Directorate must be obtained before proceeding with any such transactions.
Harmful tax competition
16. 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
17. 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
18. 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 the taxation of capital gains. 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.
Updated: December 2018