If you work in the private sector it is highly likely that your employer actively seeks ways to minimise their corporate tax bill, and why shouldn’t they? Maximising profit is the main aim of any successful business and clever accounting is not illegal. Yet, as more organisations adopt this mindset, we are all faced with a very big problem. Tax avoidance is a growing global blackhole that threatens the very systems and infrastructure that these companies rely on to be profitable in the first place. 

It’s time to stop seeing tax payments as a necessary evil and instead see them as an opportunity for businesses to invest in a better future that will benefit them as much as it will everyone else.  

Tax avoidance: Just because you can, doesn't mean you should.

While many UK workers anxiously await Rishi Sunak’s budget on 3rd March to see if the Government will be forced to make a U-Turn on its promise not to increase income tax, VAT or National Insurance, the fact is that the average person on the street (employees of big corporations included) don’t have the luxury of deciding to avoid tax increases. Meanwhile, thousands of private sector firms and wealthy individuals will continue to treat tax as optional.  

In a global economy, it’s all too easy for multi-nationals to relocate their headquarters to low-tax jurisdictions overseas and divert profits on paper. What was once a simple system set out by the League of Nations in the 1920s is now a global rabbit warren where corporations dash and dart to evade the taxman; disappearing into an intangible network of tax havens, transfer pricing schemes, shell companies and equity swaps. 

Even if the Chancellor does trigger a corporate tax raid in March (as reported by The Times earlier this month) these companies will simply find a way to bend the rules; often by employing the very same accountancy firms that advised the Government on tax regimes in the first place. This is all the more infuriating when companies like Amazon, that are renowned for tax dodging, have seen a 51 percent increase in UK profits thanks to coronavirus. 

Why does it matter?
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​As of December, more than 741,000 UK businesses had furloughed employees  and more than 1,000 corporations with a turnover of £45million+ had applied for the government’s Coronavirus Large Business Interruption Loan Scheme. Lots of these companies will have complex tax planning strategies to reduce their tax bills, which is ironic given that their boardrooms will also be a buzz with strategic discussions about ESG objectives, sustainability initiatives and SDG targets.  

These organisations are switched on to the fact that  investors and consumers want them to care about things beyond profit -  their employees, their supply chains, communities, the planet. So why aren’t they embracing  the social and commercial benefits of paying tax? 
 
The private sector is the engine of our economy and we need it to be profitable in order to keep the public sector battery powered and the wheels turning. However, the Government has spent the last 12 months bailing out the private sector to keep that engine from stalling and now it’s time for that support to be reciprocated.  

Why minimising your tax bill is bad for business

Aside from the obvious loss of money - the Tax Justice Network reports that the UK alone loses $39.5billion (£28billion) in tax revenue every year – tax avoidance doesn’t just put a strain on the economy but erodes physical infrastructure and negatively impacts individual communities in a myriad of ways that is ultimately bad for business too. ​

If your business is broken into or you have goods stolen, who do you call?  The police.  
If there is a fire at one of your offices, who comes? The fire service. 
If you need to take someone to court what do you rely on? A fair and ethical judicial system. 
How do you transport goods around the country? On the road and rail networks.  
​ How do gas and electricity get to your factories? Via the National Grid.  
Where do your employees go if they are sick? The NHS.  ​

Not to mention that a lot of us have realised in the past 12 months that our education system not only prepares the next generation of workers, but also (perhaps controversially) provides essential childcare for millions of parents across the country. 

​Businesses operating in the UK benefit from a system that enables them to be profitable here, so paying a fair share of tax is not just about taking a moral stance and ‘doing the right thing’, but is about being forward thinking and investing in the future of the market. Siphoning off profits and transferring them to low-tax jurisdictions contributes to the erosion of public  services, which over time is corporate self-sabotage.   

Turning the legal tide
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​Signs of change are afoot. 135 countries are now collaborating under the OECD/G20 Inclusive Framework to end tax avoidance strategies that exploit gaps in the rules. Here in the UK, HMRC has just launched a criminal investigation into transfer pricing schemes and we will have to wait to see if the Government will double-down on tax avoidance – although this is unlikely given the reported tensions between the Prime Minister and the Chancellor on the issue. In Europe, France, Poland and Denmark have all penalised companies found to be using tax havens to reduce their tax liabilities by banning them from receiving Covid state aid. Nevertheless, legislative change, as always, will be slow. If change is going to happen soon, pressure will need to come from elsewhere. 

 Bending to investor pressure

​At the beginning of this month, one of the world’s largest wealth funds, which is based in Norway, decided to blacklist any companies that employed “aggressive tax planning” and weren’t transparent about their tax practices. This isn’t an isolated story. Increasingly investors are demanding tax transparency.  

Research from 2019 showed that the percentage of investors that applied ESG principles to at least a quarter of their portfolios was 75 percent, up from 48 percent in 2017 and to quote KPMG, which has written a whole report on the topic, ‘corporate tax is a critical part of ESG’. While tax payments might not have the same PR appeal as carbon-zero initiatives or social value strategies, it should be viewed with equal importance.  Claire Bodanis, author of ‘Trust Me: I’m Listed’, told us: “The whole tax question is going to become higher on the agenda because all governments need money right now. Corporates need to have a position on tax in sustainability reporting.” 

Financial and reputation risks

The other corporate driver that will get businesses to pay more tax is the risk of not doing it. The coronavirus pandemic has demonstrated  that moving capital across borders can be risky, especially when economies become unpredictable or unstable. But perhaps more fundamental is the reputational risk. The media has been tax shaming corporations and individuals for a decade, but its appetite for these stories is more ferocious than ever. In 2019, Jeff Bezos spent more on a house in Beverley Hills than Amazon paid in federal corporate tax, making for great clickbait. We can expect a lot more of these stories this year and the spotlight won’t just be reserved for the big tech giants. Public sector suppliers in particular should expect special scrutiny. After all, why should the Government contract you if are (legally) minimising your tax bill?

When a viral tweet can tangibly strip a business of economic value, it’s no wonder that investors and CEOs alike are keen to avoid reputational damage from negative PR. This sort of public pressure does garner results. Is it a coincidence that Netflix has started to declare it’s UK earnings to HMRC after being slammed for paying no corporation tax in 2018? 

Tax payments as a reputational asset
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The simplest way to avoid public outcry is to be 100% transparent about tax payments. According to PWC’s annual Total Tax report, Britain’s biggest 100 firms paid £84.7bn in tax last year, 11.7% of total government receipts. So why aren’t more companies shouting about these contributions? Why don’t we see tax payments being celebrated in annual reports where communications departments can employ storytelling tactics to paint a picture of what these tax payments would be equivalent to? A new hospital? 10,000 police recruits? 100 miles of new rail network? Why have only 50 businesses signed up to the Fair Tax Mark? The Sunday Times Tax List is now in its third year, but wouldn’t it be great if there was one for businesses as well as individuals? 

There is also no reason that tax reporting should just focus on corporation tax. PAYE payments are huge sums of money that companies cannot avoid paying. While businesses might not have control over the specifics of how it is spent, these payments  will directly fund the Government’s efforts to build back better post-Covid.  

If a business fears tax transparency, then perhaps it needs to rethink its whole approach to ‘legal’ tax planning.   Apple is a company often hauled over the coals about its tax payments.  In a recent statement, the company said: “As the largest taxpayer in the world, we know the important role tax payments play in society and always pay all that we owe…..in addition to our tax contributions, we also think it's important to do more for people and society.” 

As we try to rebuild and restructure our lives, the most effective and efficient way that Apple, and other corporations like it, can do more for ‘people and society’ is to put more pennies in the public purse. 

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​This article first appeared in the Social Value Files.  To receive more content like this, sign up for the Social Value Files newsletter, a monthly round up of all things Social Value covering jobs, events, and original think pieces.