The Metric That Matters

Jolyon Maugham writes:

Here’s a transaction that did the rounds some years ago.

If I wanted some foreign exchange in the future I could enter into a contract with a bank by which it would sell me some.

Assume that, in order to get a bank to promise to give me $2bn in twelve months, I had to promise to give it £1.5bn in twelve months.

But here was the trick. What about if, instead, I agreed to pay the bank £300m now and the other £1.2bn twelve months down the line in return for that $2bn?

The bank would be pleased because it would get that £300m now. And I would be pleased, too.

Because I would – or at least this is what folks were told – get to treat that £300m as wiping out £300m of taxable profits. I would (assuming a 20% tax rate) be £60m better off for doing nothing.

I might want that £60m enough that I’d buy $2bn of foreign exchange even if I had no need for it. And some did.

I tell you this story because of what Boris Johnson wrote in the Telegraph yesterday. 

He said this: “It is absurd to blame the company for “not paying their taxes”. You might as well blame a shark for eating seals. It is the nature of the beast; and not only is it the nature of the beast – it is the law. It is the fiduciary duty of their finance directors to minimise tax exposure. They have a legal obligation to their shareholders.” 

But it’s not true, of course. Not remotely. It’s completely baseless. Boris Johnson can’t point to a single authority for that proposition – because there isn’t one.

A director’s duties are to promote the success of the Company. You can see that yourself here in the Companies Act.

The Act says – and I’m quoting it – that directors must have regard to:

• (a) the likely consequences of any decision in the long term, 
• (b) the interests of the company's employees,
• (c) the need to foster the company's business relationships with suppliers, customers and others,
• (d) the impact of the company's operations and the environment,
• (e) the desirability of the company maintaining a reputation for high standards of business conduct, and
• (f) the need to act fairly as between members of the company.”

There’s nothing at all in the Companies Act about a duty to minimise your tax bill. And I’ve highlighted the bits that are flatly inconsistent with it.

It’s like asserting that the duty to consider the environment imposes an obligation on John Lewis to deliver sofas by horse and cart.

Worse, in fact, because although it mentions the environment the Companies Act is silent on the subject of tax avoidance.

True, you would be in breach if you ignored tax – although the language above suggests it’s not in the first tier of matters to which you should have regard.

But that’s an age away from the proposition that directors have a positive mandatory legal obligation to seek out opportunities to minimise tax.

The words of the Act mean what they say. But if they aren’t clear enough for you, here’s a legal opinion and here’s some further analysis.

But you don’t need them. Why does this matter? If The Staggers ran a detailed rebuttal every time a politician got it wrong you’d soon stop reading The Staggers.

Why did I describe it yesterday as “extraordinarily irresponsible”? And “encouraging abusive tax behaviour”? 

This is why. The words uttered by a senior politician – the Mayor of London and likely future Prime Minister – carry weight.  People listen.

Directors will consider themselves obliged to seek out tax avoidance schemes. And tax avoidance schemes are bad for society. But you don’t need to take my word for that.

Here’s what the Financial Secretary to the Treasury, David Gauke said:

“While we want a tax system that is competitive for businesses, we also want a tax system where businesses pay their taxes. It is clear that attitudes to aggressive tax planning are changing – and that the public, investors and stakeholders now expect higher standards of tax compliance and more transparency from large businesses about the way they approach taxation.” 

The behaviour that Gauke is talking about is perfectly legal, if aggressive, tax planning. He’s explicitly saying that businesses should not do that which Boris Johnson says they are obliged to.

So it’s bad for society, and it’s also often bad for business.

That scheme I mentioned at the start? It failed.

Leading QCs advised it worked. It was entered into by Blue Chip companies. It was sold by one of the Big Four firms of accountants. It looked as good as a tax scheme can look. And it failed.

And the companies who entered into it lost the substantial fees they paid to the promoter and their advisers, they suffered the cost and distraction of litigating the matter through the courts, they suffered reputational damage, they were exposed to interest rate liabilities and the risk of penalties and they suffered the economic cost (in some cases) of being lumped with huge amounts of foreign exchange they didn’t want.

You see, these schemes can fail. And do fail – HMRC claim to win 80% of all tax avoidance disputes. And very often businesses are driven into bankruptcy by the consequences of this failure.

So Johnson is wrong. He’s telling businesses they must act contrary to the signals sent by the rest of government; in ways that damage civil society; and, very often, directly damage business too. But he also damages the relationship between business and society.

Businesses aren’t “sharks”. They are not hard-wired to sniff out and exploit weaknesses in broader society. There is no need to excuse moral recidivism

Public confidence in business – low since 2008, and not only on the left – isn’t nurtured with blind celebration.

What we need instead is a defence that celebrates what business can enable. But also that searches out the ways in which business can better deliver on the only metric that matters: the health of our society.

Starting with, to borrow George Osborne’s words on Friday, paying their fair share of taxes.