Contractor guide to the Bribery Act 2010: client hospitality and incentives

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Contractors operating mainly or wholly in the UK and with UK-based clients have little to fear from the Bribery Act 2010. In general, they can continue to offer clients and business contacts hospitality, such as meals out and tickets to events. But those operating abroad should ensure they comply with the act, or face penalties that range from fines to imprisonment.

The Act, enforceable from July 2011, mainly targets UK firms operating in overseas markets, particularly in developing countries where bribery of public and private sector contacts can be commonplace. Contractors operating in such markets may wish to consider taking action, such as that recommended in the Ministry of Justice’s quick-start guide, as the Act introduces four new offences that can apply to both contractor limited companies and to contractors personally.

Although reasonable levels of hospitality are permitted by the Act, ‘facilitation payments’ to officials are bribes and contractors caught offering such payments could be prosecuted under the Act.

New offences contained in the Bribery Act 2010

Contractors, particularly those operating overseas, need to consider four new offences included in the Act:

  • Bribing another person, which means offering financial or other incentives to act improperly or rewarding them for doing so
  • Taking a bribe to act improperly
  • Bribing a foreign official to win business, keep business or gain business advantage
  • Failure on the part of a business to prevent bribery by its employees, or on its behalf.

The first three offences could be committed by the contractor individually if caught ‘paying-off’ an official, or by the contractor’s limited company. However, in contracting terms, for the vast majority of one or two person contractor businesses, the distinction is minor as it is aimed at prosecuting larger companies that allow bribery to take place on their behalf.

According to the Ministry of Justice guidance, contractors offering a proportionate level of hospitality to their clients, such as meals out, tickets and travel expenses to events, and gifts won't find themselves accused of bribery

The final offence, failure on the part of the business to prevent bribery, is also principally targeting larger businesses that have not implemented policies to prevent bribery among their employees and representatives. This offence is wide-reaching in scope and causing many international companies concern, but is unlikely to affect small businesses, such as contracting limited companies.

It should be noted, that although a contractor may be performing services outside of the UK, perhaps in a developing nation where kickbacks are accepted, if they do business in the UK and their limited company is registered in the UK, then the Act will still apply.

When does hospitality become a ‘facilitation payment’, or a bribe?

According to the Ministry of Justice guidance, contractors offering a proportionate level of hospitality to their clients, such as meals out, tickets and travel expenses to events, and gifts won’t find themselves accused of bribery.

However, the official guidance warns that the authorities, and specifically the Serious Fraud Office (SFO), might start to take an interest if the level of hospitality was out of all proportion to a typical contractor’s business. The SFO is also likely to take an interest if the hospitality results in an undue level of influence over the recipients’ decision making, particularly when that recipient is responsible for awarding new business.

The Ministry of Justice defines ‘facilitation payments’ as “payments to induce officials to perform routine functions they are otherwise obligated to perform”. There is no doubt from the guidance that such payments are considered to be bribes and covered by the Act.

Implications for agencies and contracting service suppliers

‘Administrative fees’ and sales commissions are not considered to be facilitation payments, so typical commercial arrangements between recruiters and contracting services suppliers are likely to remain in place.

The Act will apply to agencies or service suppliers who accept payments and/or disproportionate or lavish hospitality as inducements to recommend specific service providers to contractors, particularly if such payments are outside any formally agreed sales commissions or fee structures.

Tax implications of ‘excessive’ hospitality

Contractors can legitimately treat clients and business contacts to hospitality, although these costs are not allowable against corporation tax and VAT. However, excessive hospitality can be disallowed and treated as a taxable benefit, incurring Benefit in Kind income tax and National Insurance Contributions liabilities.

No definition of excessive hospitality is given in the guidance. But if, for example, a contractor established a pattern with a business contact, or another contractor, and regularly expensed meals and the cost of travel and tickets for events and this was spotted during an HMRC inspection, the payments could be reclassified by HMRC as a taxable benefit.

Both for tax purposes and to ensure a robust rebuttal of any accusations of making facilitation payments under the Bribery Act 2010, it is recommended that contractors should maintain records of all hospitality entertainment and its purpose. Then, in the unlikely event that the SFO or HMRC come knocking, the contractor can easily provide evidence that they have acted within the law.


Alliance Accountants

Published: Friday, April 29, 2011

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