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The corporate duty to avoid tax

Summary

27 August 2012

Tax avoidance is a much misunderstood subject. The directors of a publicly held company owe a duty to the company to protect its assets, which include minimising the taxes that the company pays to the extent that they can do so within the law.

I have set out my thoughts in a comment piece on Conservative Home which is reproduced below.

Mohammed Amin: The corporate duty to avoid tax

Mohammed Amin is Vice Chairman of the Conservative Muslim Forum. He is writing in a personal capacity.

A few years ago I found myself chatting with a very senior official in HM Revenue and Customs. I mischievously asked him “Would you agree that it is the duty of directors of public companies to ensure that their company avoids as much tax as possible?”

Needless to say the anonymous official did not agree. However I do not recall any coherent rebuttal from him.

In some cases, I think “No” is the correct answer. For example:

  1. Avoiding tax should never be allowed to interfere with business efficiency. Sometimes businesses enter into excessively complex structures not justified by the tax saving. If saving £1 of tax reduces your pre-tax profits by £1.50 then you have done something stupid!
  2. Some businesses which sell to individual consumers trade upon a reputation for being particularly socially conscious, ecologically aware, fluffy or cuddly. If such a business acquires the reputation of a “tax avoider”, it may lead to some individual consumers taking their business elsewhere, to the extent that the loss of business outweighs the saving in tax.
  3. A large part of the company’s sales may be to the Government, which decides to punish the tax avoider by choosing another supplier.

Apart from similar cases, in my opinion the directors of a public company do have a duty to ensure that their company avoids as much tax as it sensibly can.

Legally, the director’s duty is owed to his company. Where the company is, and will remain, solvent, the interests of the company are essentially the interests of its shareholders. It exists to benefit them by carrying on a business in a way that maximises long-term profitability. That involves charging the highest sustainable prices while paying the lowest sustainable prices for business inputs and wages. Taxes are just another business cost, like wages and electricity.

Taxes are paid because governments use their legal powers to take part of the company’s revenues or profits away from the company. Since companies must obey the law in each country in which they operate, they have the duty to pay all taxes lawfully levied, subject to taking all lawful measures to reduce those taxes to the minimum amount required by law. That is what tax avoidance means.

Furthermore, the company should only remain in the UK if, in the opinion of the directors, remaining here will maximise the long run post tax return to shareholders. If shareholder returns will be improved by the company emigrating, as several large public companies have done in order to reduce their overall tax liabilities, then it is the duty of the directors to cause their company to emigrate, regardless of the impact on the UK Exchequer.

Implications for tax policy

Fortunately over the last few years our government appears to have started to understand the points made above. It has revised UK tax law to make it less compelling for UK companies to emigrate. However much more needs to be done if the UK is to have a business friendly tax system and we do not have indefinite amounts of time in which to make the changes necessary.

Many foreign countries have recognised that a business friendly tax system encourages internationally mobile businesses to move to their country. What the UK needs to do is to reduce business taxes of all kinds, including but not limited to reducing corporation tax much further. Since the Exchequer is short of money, the way to make up for the short-run loss of tax revenue is to increase taxes paid by individuals, especially those taxes such as VAT which do not act as a disincentive to work.

Selling a policy of lower corporation tax and higher VAT to the electorate may appear challenging! However I believe that if the argument is put forward with conviction it can be done. Firstly as Conservatives we have to believe ourselves that this is the right policy.

 

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