The latest tax scandal involving HSBC is a reminder of how the issue of taxation has become a regular fixture on the national news agenda.
Previously rarely mentioned beyond the business pages, in recent years taxation has become a matter of much wider public interest thanks to global brands such as Google, Starbucks and Amazon, who have all faced criticism for the level of corporation tax they pay in the UK. We’ve also witnessed well-loved celebrities embroiled in their own personal tax avoidance scandals. Understandably the public feel a sense of outrage that these companies and individuals are not paying their ‘fair share’ of tax. But who defines what the ‘fair share’ is? As far as the public is concerned, tax has now become a moral issue as much as it is a legal one.
Since these organisations have received such negative press and a public backlash, other businesses have scrambled to reassure consumers that they are ‘fair tax payers’ proudly sporting a kite mark which claims to prove this. But taking the view that tax is a moral issue could have serious repercussions for the taxation system in this country. One of the most crucial aspects of any tax system is clarity and certainty. If we make paying the right amount of tax a moral issue rather than a legal one, we risk injecting more uncertainty into an already convoluted system in dire need of reform. Instead, what we need is a taxation system that clearly sets out how much tax every business, and every individual for that matter, should pay, by law.
Nearly all of us engage in tax avoidance to some extent, from the use of ISAs to our personal tax allowance and making use of tax free pension contributions of up to £40,000 a year. There are a whole range of allowances which we take advantage of on a day to day basis which could technically be classed as avoidance but is viewed as socially acceptable. The issue is that by making tax a moral issue a grey area has emerged which sits between evasion and socially acceptable tax avoidance.
While the government has and continues to close so-called tax ‘loopholes’ which have been abused by corporations, it is worth remembering that there are in fact loopholes which exist within the tax system for legitimate reasons such as to incentivise and support growth in a specific industry element of business or in order to improve the work/life balance of our workforce.
Bill Gates, CEO of Microsoft has spoken of a dangerous ‘second standard’ emerging in relation to tax which introduces uncertainty to business. He has publicly stated that ‘If someone wants those companies to pay more tax they should change the rules'. The obligation to pay tax is a legal issue and if we want to avoid complex tax avoidance from organisations and individuals then we must make the system simpler and clearer through legislation.
This ‘second standard’ also provides the opportunity for unscrupulous politicians to point the finger of blame at business whenever they need a quick popularity boost or to explain away a deficit between revenue and spend. Keeping the amount businesses are legally required to pay low in order to attract organisations to do business in the UK and increase tax revenue, but then adding a moral obligation to pay what is ‘fair’ creates a system in which businesses have no clear idea of how much tax they should pay. It also means that the Government cannot predict how much revenue it will receive. Under these circumstances, neither side can properly plan for the future with a clear picture of the resources they have at their disposal.
Making tax a moral issue shifts the burden of deciding just how much tax to pay away from legislators and onto the shoulders of businesses and individuals. This is not the way to develop a clearer, simpler system. Only by proper legal process can we create a structure in which companies understand and work within the parameters of the law. Taxation simply isn’t a matter for the moral compass, no matter how emotive a subject it might be.
Chas joined the technical department of ACCA in 1991 after 11 years working in private practice. He represents ACCA at domestic and international expert groups on tax convened by the UK government and HMRC, the European Commission, BIAC, FEE and UEAPME.