Including additional properties in the contract

2.12  The Department can add properties to the contract to keep its own estate management costs low. Since contract signature, the Department has taken on 238,000 square metres of new space including 59 offices, car parks, storage, and specialist operation areas, to accommodate new responsibilities such as tax credits and changes in work practices towards centralised processing and call centres. Since 2003 it has been paying Mapeley the facilities price for 11 properties with the intention of bringing them into the contract (it vacated and stopped paying for one of these properties in 2005). It has not formally incorporated them into the contract due to issues over offshore ownership.

2.13 At contract signature, the Department transferred the freehold properties to Mapeley STEPS Limited. The company was registered offshore in Bermuda, enabling it to reduce its tax liabilities under UK laws. Any gains made on sales of these properties are not subject to UK tax. The Board of the Inland Revenue became aware of the tax arrangements late in the procurement, and the Board of Customs & Excise only after contract signature. The Inland Revenue concluded that it would not have been lawful to exclude Mapeley from the bidding process because of its tax arrangements.11  In response to a Committee of Public Accounts recommendation, HM Treasury issued guidance in 2003 stating that departments generally should not use tax avoidance schemes.

2.14  Mapeley estimated that it would have had to increase its bid price by £55 million (in 2001 prices) to cover additional UK tax had it kept ownership of the buildings in the UK. Our previous report concluded that this was not a material figure in a deal of this size. Given inevitable uncertainties surrounding forecasts of property sales 20 years into the future, this figure was approximate. Mapeley estimates that it has saved approximately £2.6 million in tax on gains made through the sale of properties to date.

2.15  During negotiations to include the first 11 additional properties in the contract, in June 2006 a company in the Mapeley group, registered offshore, purchased the freehold of one property as part of its Direct Property Investment portfolio. Because of concerns around offshore ownership, the Department requested that Mapeley transfer ownership into the UK. Mapeley agreed to do so once the properties were included in the contract, but in the current climate this could entail losses. The Department therefore considered it should exclude this property from the contract, but it now intends to seek its inclusion.

2.16  As a result of these delays, the Department has been paying the facilities price for the additional properties since 2003 without obtaining the benefits of inclusion in the contract. The Department can designate the category of any buildings included in the contract, and for core buildings it immediately receives equivalent space as core vacation allowance. The Department plans to designate seven of the buildings as core, increasing core vacation allowances it can use at no cost by 21,800 square metres. If it brings these buildings into the contract before using further core allowances, it would save compensation it would otherwise have to pay. The Department and Mapeley are currently negotiating the basis on which the buildings will be included in the contract, and the interpretation of the compensation clauses in the contract.

2.17  The Department's delays in concluding negotiations on the initial group of properties means it has not started negotiations on other properties which could be brought into the contract. It has identified approximately 115,000 square metres of space it is considering for inclusion. While they remain outside the contract it continues to bear the costs of estates management functions for these properties.

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11 See previous NAO report, PFI: The STEPS Deal HC 530 2003-04, for details.