1.38 The supplier had agreed to accept liability for German trade tax (a tax on profits) up to a level of 14.5 per cent. During negotiations in July 1997 before the appointment of the preferred bidder the supplier agreed to accept all trade tax risk in return for an additional payment of £2.1 million.
1.39 At the time negotiations between the supplier and the FCO were proceeding about trade tax, the FCO did not make a quantified assessment of what the likely trade tax burden might be. The FCO considers that German trade tax might rise higher or faster or both than expected; if that happens, this risk has been transferred to the supplier and would represent an additional benefit to the FCO.
1.40 The supplier also agreed to accept costs which might be payable as a result of changes in health and safety legislation up to the end of the third year of the operating phase of the contract. Following negotiations in July 1997, the supplier also agreed to accept costs of up to £200,000 a year in Years 4 to 31 of the operating phase of the contract. In return, the supplier received an increased payment of £1.2 million. This arrangement was designed to encourage the supplier to take steps to minimise its liability for health and safety payments. The agreement reached also ensured that the supplier will meet all costs incurred in Years 4 to 30 of the operating phase of the contract where those costs resulted from changes in health and safety legislation up to the end of the third year of the operating phase of the contract.
1.41 The FCO did not carry out a quantified assessment of what they might have to pay by way of payments to the supplier for changes in health and safety legislation. The FCO considers, however, that the large-scale building work in Berlin is causing the Berlin authorities to take a much more rigorous approach to health and safety which is likely to increase the burden of this risk to the supplier.