Tax avoidance is in the news again.
Work undertaken by the OECD at an international level has brought into focus the desire of regulators across the globe to see greater fairness by businesses when it comes to meeting their tax obligations. And this is balanced by the desire of companies to see regulators provide clear guidance as to what is and is not possible. As well as simplification (please).
The environment for tax planning has changed out of all recognition in recent years. This is especially due to the impact of the recession and the attitude of wider stakeholder groups towards corporates’ tax mitigation strategies – whether UK based or those operating on a global basis.
In order to contend in the global economic markets, the UK wants to have, and in fact needs, a competitive tax environment, albeit one whereby sufficient revenue can be raised to provide for essential services. The Conservative Party conference saw George Osborne make the fair, and obvious, point that by having the UK’s tax jurisdiction as one of the most competitive in the developed world, it is essential that those who want to operate here must pay their fair share. This has to be right, based on how benign the UK’s corporate tax regime is.
But is it wrong for a company to try and avoid tax? To minimise how much it pays through tax planning?
The confusion between evasion and avoidance in this discussion is unhelpful. Evasion is illegal and should be litigated against with all vigour.
But avoidance? Or planning? Or use of law? Directors of all companies – small, medium, large or multinational – have a clear duty to minimise the costs they face and achieve the maximum returns for shareholders.
Tax is just another cost faced by companies and therefore directors’ responsibilities in this regard are no different than those regarding, say, fuel costs.
We all pay for our utility services and there is no law against us, as citizens, switching suppliers if one electricity supplier has a cheaper offer than another.
At a moral level this is no different from a company, if it is able to, taking advantage of a tax regime that is beneficial to it because it enables it to reduce its overall tax burden. Morals aren’t scalable. Either something is acceptable on principle or it isn’t. Size of saving doesn’t come into it.
Lawmakers have a role to play in this debate going forward and there are two key issues they need to address.
First of all, education. Most who comment on tax, and especially those who suggest corporates “get away with it” do not understand what tax is payable, how it is payable, by whom and when.
Whenever an advisor such as myself tries to explain that sometimes the tax regime “excuses” the corporate from paying, because the individual shareholder will pick up the tax, it is rarely heard.
Moreover, corporates also act as an unpaid collector for a variety of other taxes that their activity generates and contributes significantly to the economy, such as VAT, PAYE and NIC and some of these are also a real cost to the business.
Politicians and the Public Accounts Committee have a role to play here and must accept responsibility for explaining what they are talking about since hysterical sound bites dilute the quality of the debate.
Secondly, there needs to be greater simplification to make the tax landscape easier for businesses to navigate. In some cases “complication” can be justified. But as Grant Thornton’s joint report with the CBI, Stuck in the Middle, demonstrated, taxes hold back mid-sized businesses” and there are many tweaks to the system that would accelerate growth, especially for those corporates not big enough (yet) to have suitable in house technical tax support.
So for me, avoidance isn’t bad. It’s a consequence of using the law – in spirit and word. The vital thing is, if you want a fair tax regime based on a broad base but with low rates, you’d better play by those rules. It is in everyone’s best interests that you do.
Jonathan Riley is Head of Tax at Grant Thornton UK LLP