Corporate tax, ethics and avoidance: update
By way of a postscript to my recent post on Tax, ethics and the botta segreta, I report on a session on corporate taxation which which took place yesterday before the House of Lords Economic Affairs Committee (it does not seem to have attracted much media attention). Evidence was taken from several leading solicitors in this area, among them Steve Edge, with whom I have had the pleasure of working closely many times over the last 30 years. Despite his usual charm, I suspect his view that the system of corporate tax is “about right” will not have convinced a committee concerned with British companies who feel disadvantaged by the legal ways in which foreign multinationals doing business in this country can do so at far lower levels of tax. Margaret Hodge, whose evidence followed, captured the public exasperation perfectly, and robustly defended a common-sense approach.
They were at times at cross purposes: I suspect when Edge said that the level of tax avoidance is lower today than hitherto, he refers to the artificial, marketed schemes with opinions from some of the QCs Hodge particularly dislikes (there is less of this today because simple planning is now so effective for multinationals). And while Hodge described a “spectrum” running from simple planning to avoidance to evasion, and aptly discussed marketed schemes with opinions that haven’t yet been found to be wrong (so that they occupy the limbo of Schrödinger’s cat), her reductionist approach, threatening to name and shame indiscriminately across the spectrum, may be counterproductive.
The least convincing part of Hodge’s testimony was what should be done about this beyond shining the spotlight which she has done so far so effectively (even if the beam is rather too broad). Quizzed about this, she mentioned a proper GAAR, but almost as an afterthought. In my view such a rule, combatting avoidance, not just abuse, is central – but it must be accompanied by an efficient pre-clearance system (including an appeal system) if commerce is not to grind to a halt. That requires politicians to invest in HMRC resources and to chose the appeal tribunal with care (with common sense at least as well represented as professional expertise), and will be anathema to tax experts who charge for advice on how HMRC and the courts may interpret the legislation when pre-clearance will allow anyone to find out more cheaply and more certainly. I suspect that Parliament lacks the will to go this far, in which case Edge’s assessment may prove to have been the more astute reading of the Realpolitik.
Hodge is right too to question the specific details of the conduct of multinationals’ sales teams in the UK where transactions are booked abroad: but litigating if the facts are not conclusive may also be counterproductive. The crucial point remains that our tax system is vulnerable to totally legal planning by multinationals (if they follow simple procedures carefully), and that is why politicians need to reexamine the question far more deeply than they have so far. Transfer pricing simply doesn’t work where multinationals have vertically integrated business models from which they make more profit than companies who provide only part of the supply chain: the added value is the grin on the Cheshire Cat that remains after arm’s length pricing for each component is taken away, and simple planning, applying the arm’s length principle strictly, will allow this value to escape taxation.
That point has been made before by John Kay, in one of his many intelligent and original pieces in the Financial Times. I wish I could say the same of his contribution in today’s edition, Directors have a duty beyond enriching shareholders, in which he attempts to persuade us that the broader duties imposed on directors by the Companies Act 2006 mean that they shouldn’t engage in tax avoidance. His argument is unconvincing because the considerations in the Act are vague and imprecise (some of us may feel uncomfortable in finding such piety in a statute), and fail the practical test of how a company board is supposed to decide between one course of action and another. If the securities markets require them to choose the more profitable route, only a Canute would turn to the duties in the Act.
One part of the argument which Kay doesn’t spell out as he expatiates on the duties to other stakeholders actually concerns the members themselves: the fact that these pension funds and similar institutions are likely to be shareholders in other companies that will have to pay more tax as a result of effective planning is to my mind the most obvious objection to the pursuit of corporate tax avoidance. Sadly a lawyer is likely to argue that “member” in the Act means member qua member of that company, disregarding the characteristics of any particular individual member. Although a contrary interpretation of s.172 is arguable, the obligation is to act in the way the director considers meets this duty, and many will not agree with the broader interpretation. That is why the Act can’t be applied in the way Kay hopes (nor can it help level the playing field with branches of foreign companies). And why tax avoidance will continue until Parliament gets a grip on these issues which are far more subtle than it has so far understood.
Here is the judgement handed down today in Mehjoo v Harben Barker (A Firm) & Anor  EWHC 1500 (QB) in which the court found that an accountant has a duty to advise his client on the availability of a tax avoidance scheme. You can form your own view as to how this fits with John Kay’s interpretation of the duties under the Companies Act (I am not suggesting that they are logically inconsistent).