Procurement Act 2023 introduces new mandatory exclusion grounds from UK public bids for tax penalties

The Procurement Act came into force on 24 February 2025. As with the previous regime, suppliers risk being excluded from participating in public procurements and winning public contracts in specified circumstances. The Act retains the concepts of mandatory and discretionary exclusion grounds and embeds the "self-cleaning" process into the overall definition of whether a supplier is "excluded" or "excludable". There are, however, some significant changes – including a new mandatory exclusion ground for deliberate tax penalties.

Deliberate behaviour

While the previous public procurement legislation included exclusions in relation to tax, these are significantly expanded under the Act. In particular, it includes a new mandatory exclusion ground for certain "deliberate" tax penalties that have become payable at any time since 25 February 2022 (and, from 25 February 2027, any time in the previous five years before the public procurement takes place).

Tax-geared penalties (that is, charged as a percentage of the tax due) can be imposed in circumstances, including where taxpayers have:

• made errors in tax returns (or other documents submitted to HMRC) which leads to an underpayment of tax; or
• failed to notify liability to tax as required, such as failing to properly register for VAT.

The level of the penalty charged is in part determined by the type of taxpayer behaviour involved. "Deliberate" behaviour for these purposes is not defined in legislation but is typically understood to mean where a taxpayer knowingly does something wrong – for example, they knowingly submit a tax return containing an error with the intention that HMRC will rely on it, or fail to notify liability to VAT despite knowing that they are required to do so. This is a subjective test and the courts will consider what the taxpayer's knowledge and intentions were at the relevant time.

In that respect, although these are civil monetary penalties, the distinction between "deliberate" behaviour and tax fraud, which is a criminal matter, is a very fine one (and HMRC will refer the most serious cases for consideration of criminal proceedings where appropriate).

However, deliberate behaviour may also include circumstances where, although the taxpayer may not have subjectively known the correct position, they have shut their eyes to it ("blind-eye knowledge" or "Nelsonian blindness"). Similarly, the Supreme Court has suggested that deliberate behaviour may include "recklessness". A taxpayer might be considered to have acted deliberately if, for example, they consciously failed to seek advice when they knew that an issue likely existed. The lines with negligence can become somewhat blurred.

The amount of deliberate tax penalties can be heavily mitigated through taxpayer cooperation and disclosure. In the past, taxpayers might have been inclined to accept deliberate penalties, even where there was a clear argument that the behaviour in question was negligent. That commercial decision could now potentially prevent them from participating in a public procurement.

Self-cleaning

Under the Act, if a mandatory exclusion ground arises, the contracting authority must go on to consider whether the circumstances giving rise to the exclusion ground are continuing or likely to occur again. The Act contains a list of factors that an authority may have regard to in considering this, including any evidence that the taxpayer has taken the circumstances seriously, for example by cooperating with HMRC. Only if the authority considers that the circumstances are continuing or likely to occur again must it exclude the supplier from the procurement.

Application to third parties

Significantly, a supplier may be at risk of exclusion if certain third parties have been issued with a deliberate tax penalty.

The mandatory exclusion ground for deliberate tax penalties applies in respect of the supplier that is bidding for the public contract, and the supplier's "connected persons". This is broadly defined to include, for example, parents, subsidiaries, directors, and any person who exercises significant control over the supplier.

Suppliers are also at risk of exclusion if a deliberate tax penalty has been issued by HMRC to a supplier's "associated person" (defined as any person that the supplier is relying on in order to satisfy the conditions of participation, other than a guarantor) or a subcontractor (even if not an associated person).

The application to directors may lead to odd situations. For example, HMRC have the option to issue deliberate tax penalties arising in respect of a company's tax affairs to a director in their personal capacity if that director is responsible for the relevant behaviour. Suppliers might therefore find, for example, that they have escaped a deliberate penalty imposed due to the actions of a director but still face sanction as a corporate for the purposes of bidding in a public procurement. A supplier could even find itself at risk of exclusion if a director has received a deliberate tax penalty in respect of their personal tax affairs. Given the need for authorities to consider evidence and explanations as part of their assessment of whether the ground is continuing or likely to reoccur, these are the type of circumstances that businesses would hope should be possible to resolve with careful handling.

Non-UK equivalent penalties

Under the Act, the mandatory exclusion ground for deliberate tax penalties would apply if the relevant person has received an "equivalent" penalty – in other words, the behaviour giving rise to a non-UK penalty would, if committed in the UK, give rise to a deliberate tax penalty.

Suppliers will therefore need to review the position in other jurisdictions. Given the potentially broad definition of "deliberate", this may not be straightforward.

Time limits

Each of the exclusion grounds has an applicable time period in which the conduct must have occurred in order to be declared when bidding for a public contract. In this case, a mandatory exclusion ground applies to deliberate tax penalties that have become payable in the last five years, or otherwise in the three years preceding the Act coming into force. The government's guidance states the intention "is not to punish suppliers for past misconduct but rather to safeguard against unacceptable risks".

However, in respect of deliberate penalties, the reality is that the relevant behaviour might actually have occurred a considerable time ago. In order to issue a tax-geared penalty, HMRC typically have a 12-month window from when the underlying tax assessment has been issued (or, if the tax assessment is challenged, after the appeal proceedings have been exhausted). In turn, HMRC normally have a 20-year time limit to issue tax assessments where there is deliberate behaviour involved.

From a due diligence and monitoring perspective, suppliers will only be concerned with those penalties issued within the prescribed five- or three-year time limit. However, for self-cleaning purposes, if the relevant behaviour did take place many years earlier, it may be easier to argue that this should not result in exclusion (for example, if the management or circumstances of the relevant business have changed or if there have been no repeat incidents).

Other tax exclusions

There are other mandatory exclusion grounds relating to cheating the public revenue and the fraudulent evasion of tax, civil evasion penalties and defeated tax avoidance arrangements covered by the disclosure of tax avoidance schemes regime (DOTAS).

There is a specific exclusion ground for any offence under the Criminal Finances Act 2017 (CFA) for failure to prevent the facilitation of tax avoidance. Although there have been no prosecutions under the CFA yet, this exclusion may become increasingly important. The March 2025 spring statement referred to HMRC increasing tax prosecutions, including for tax fraud "facilitated by those in large corporations" (a reference to the CFA). This echoes the Labour Party's statements relating to tax disputes during the general election. It is the clearest signal yet that we might soon see the first CFA prosecution.

Debarment list

Once a supplier is actually excluded from a public procurement for a mandatory exclusion ground, it will then be referred for investigation into possible inclusion on the debarment list as an "excluded supplier".

The debarment list is a centrally-managed list of suppliers who must or may be excluded from bidding for public procurements for a certain period of time, depending on the reasons for their inclusion on the list. In relation to deliberate tax penalties, if a supplier is added to the list on grounds of having committed deliberate tax penalties, it must be excluded from all public procurements for a period of five years after the penalty becomes payable, or another period of time at the government's discretion.

Osborne Clarke comment

Under the new regime, the exclusion risk now extends down supply chains. Suppliers will need to ensure that there are appropriate procedures in place to provide transparency with subcontractors and other relevant third parties. Where a potential mandatory exclusion ground for tax is discovered, it is important to seek specialist advice to understand the circumstances of the alleged tax misconduct in question.

More proactively, suppliers will want to ensure that current tax issues do not unnecessarily affect a future public procurement process. Deliberate tax penalties under active appeal are ignored for the purposes of the Act – businesses that are concerned about a potential penalty's impact on a future procurement process should seek specialist tax disputes advice.

More broadly, the exclusion regime encompasses a wide range of mandatory and discretionary exclusion grounds, each with their own applicable time periods and nuances. Suppliers are actively encouraged to check whether any exclusion grounds apply, but doing so can be challenging given the complexity of the legislation. In order to support suppliers in undertaking their own risk assessments, Osborne Clarke has produced an Exclusion and Debarment Health Checker that helps suppliers understand what conduct is (and is not) caught by the exclusion grounds.

Download the Health Checker.