Tax

Morality versus legality – the tax avoidance debate

November/December’s edition of Accounting Technician magazine contained an excellent thought provoking article, “the Tax Correctors” which featured, amongst other things, a debate between three accountants and an entrepreneur over morality in tax.

Morality and ethics in tax most certainly have their place however the appetite for entering into tax saving schemes has now changed, particularly for large corporations.

Since the turn of this decade the combined efforts of George Osborne, HMRC, various Parliamentarians and the Court-of-Public-Opinion have blunted the appetite of most taxpayers for entering into elaborate arrangements, whose sole purpose is often to avoid tax.

This was most powerfully evidenced by MD of Starbucks Kris Engskov’s statement in December 2012 that his company would pay “a significant amount of tax during 2013 and 2014, regardless of whether the company is profitable”.

His pronouncement came in the wake of unprecedented public criticism of the fact that the company has only paid £8.6m in tax in the preceding 14 years.

Mr Engskov informed the BBC, “since we started doing business here, we have always organised our tax affairs according to the letter of the law.”

At the time Starbucks admitted that the degree of hostility and emotion surrounding the tax issue had “taken us a bit by surprise” and that the move for a voluntary tax payment was an attempt to rebuild its brand reputation and trust with from customers.

Morality versus legality

Taking at face value the coffee company’s struggles to be profitable in the UK due to competitive pressures, the only way that it could guarantee to pay tax, is for it to forego claiming some of its legitimately tax-deductible trading expenses. In other words, the company was now more concerned with paying tax that might otherwise not be due in order to preserve their brand reputation.

Indeed, Engskov’s statement prompted Stephen Williams, Treasury spokesman for the Liberal Democrats to say, “It is extraordinary. People have been joking that some of these multinationals seem to think that paying tax is voluntary. Well Starbucks have just confirmed the joke really.”

The above argument of voluntary tax payments could be viewed as insulting for small, micro and nano businesses. For these businesses tax is never a lifestyle choice, or part of their marketing-spend. It was what they have to pay on their profits because that is what the law says. These businesses could not afford the fees charged by the purveyors of tax avoidance schemes.

The article offered two common-sense comments that really chimed with me:

  • “Don’t spend £1 to save 20 pence”, and
  • “I’d rather that they (small business clients) concentrated on generating more income”

Both were just the sort of things that I often said to my clients and are good adages for an AAT Licenced accountant to always have in mind.

The first observation draws attention to the fact that a company wishing to save 20 pence in tax has to commit to spending £1. Consequently, its profits decrease by a net 80 pence.

Put that simply, it is easy to see that unless there is a specific tax-related reason to the contrary, a business should only commit to spending money when there is a greater business case than purely tax mitigation.

While the second, is even more profound as it seeks to stay focused on income generation. This is the right advice for any business and as you accrue larger profit – guess what – you’ll have more tax to pay. As Paul Bulpitt, founder of the Wow company says, “I’d rather they concentrated on their business thriving and growing. If you make a bit more money, the tax you pay is less of an issue.

More or less tax codes

The only aspect of the whole debate that I found myself at odds with was a radical, but well intentioned call for a tax code of 25 pages, as opposed to the current behemoth that is in excess of 17,000.

While the majority of advisers and other commentators might be clamouring for a shortened version, I personally do not care how many pages there are, provided that they achieve what must be the holy grail of our profession – simplification.

I know that to some my view must be considered to be heretical, but indulge me for a minute by considering that over the past few decades despite the exponential growth in the amount of programming that goes into computers in order to make them function, they are now much easier to use.

Wouldn’t you be prepared to accept a larger tax-code if it resulted in easier compliance, greater transparency and a simple system that was fair to all?

AAT tax policy adviser Brian Palmer discussed Making Tax Digital with Simon Green from Tolley at AAT offices yesterday.

Brian Palmer is the tax policy adviser for AAT.

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