Tax (and perhaps finance generally) can seem quite daunting if you're not an accountant . . . But clearly it's essential for your long-term business success to understand your company's financial performance. Remember, sustainability is often defined as people, planet and profits! So what I'm aiming to do in this three-part resource on tax is to:
1. explain why tax is a key ethical and sustainability issue;
2. explore whether tax transparency can potentially benefit your reputation; and
3. outline some practical tips for managing tax.
Tax transparency and business reputation
Lots of people don't like paying tax. But a lot of us like public services such as the education system and the NHS. Which perhaps explains why media revelations (such as the Panama Papers leak) about wealthy individuals and global corporations actively striving to reduce their tax liabilities cause such an outcry. As PWC (Price, Waterhouse and Cooper) advise their clients: "The spotlight is firmly fixed on the amount of tax that businesses pay, so it’s more important than ever that you’re clear about your tax transparency and communications. . . . Tax reputation is a key business issue."
However, tax legislation is hugely complicated. And this is due, in part, to successive attempts to close off tax loopholes which in turn create unanticipated consequences and new loopholes.
If you want a better understanding of current tax issues, it's worth taking a look at Owen Jones' interview with Margaret Hodge (former Chair of the Public Accounts Committee) in The Guardian in late 2016. She explains the difference between tax planning (acceptable and normal business practice) and tax evasion (an illegal attempt to avoid paying tax). And she discusses tax avoidance, which falls somewhere in-between tax planning and tax evasion. It's not illegal and, in fact, it's an increasingly acceptable and common business practice. But does that make it right? Margaret Hodges describes tax avoidance as exploitation of inevitable ambiguities in the law in a way which is "morally reprehensible and wrong".
But why is it wrong? The Global Reporting Initiative (an international independent organisation helping businesses, governments and other organisations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others) report that "corporate tax avoidance in Europe is estimated to cost EU countries EUR 50-70 billion a year in lost tax revenues".
In the Guardian interview (above) Margaret Hodge discusses the UK 'tax gap'; the difference between tax which should be collected and tax which is actually collected. HMRC have calculated the 2014-15 tax gap as being around £36 billion. But Richard Murphy of Tax Research UK argues that this figure is misleadingly low as it ignores, for example, profit-shifting techniques used by large multinationals to move profits to low or no tax jurisdictions. He estimates the tax gap could have been as high as £119.4 billion in 2013-14. Either way, that's an awful lot of UK hospitals, or schools!
In the first section of this three-part resource on tax, I asked whether it's a level playing field when it comes to tax. Tax campaigner, Richard Brooks, argues that HMRC's 'customer relationship manager' model and lack of public transparency when dealing with the largest corporations gives an unfair advantage, perpetuating inequality. Margaret Hodge also discusses the 'revolving door syndrome' whereby tax specialists from major accounting and auditing firms advise governments on creating tax law, then use the knowledge they've gained to advise wealthy individual and corporate clients on avoiding those same taxes.
But conscious consumers increasingly expect companies to contribute responsibly to the societies in which they generate profits. In the future, will people favour companies taking a responsible approach to tax? And how can your company connect with those potential customers?
One option is to sign up for the UK's first 'fair tax' accreditation, the Fair Tax Mark, to demonstrate your commitment to doing the right thing when it comes to tax. Such accreditation won't be right for every company, of course; it'll depend on your size, strategy, and availability of funds and other resources. But, hopefully, the more companies promote their commitment to fair tax, the more public pressure there'll be for all companies to take a responsible approach to tax.
Above all, be proud to pay your fair share of tax, supporting vital public services and contributing to a fairer society overall.
Contributed by Sue Phillips (ACCA)
Fair Tax Mark (fair tax accreditation)
Tax Justice Network (research on offshore finance and tax havens)
'The Great Tax Robbery: How Britain became a tax haven for fat cats and big business', by Richard Brooks
Gov.uk on 'Money and tax'
Gov.uk on 'Business tax'