Why tax avoidance is a breach of contract

Posted on

I have the following post on the UK Uncut blog this morning. They used the title “If ever there was a campaign the Tories should support‚Ķ”:

“Those who oppose the UK Uncut tax protests argue — as the new head of the CBI did in the Observer today - that a company has a duty to be “tax efficient”. In saying this Carr argued:

"What are the rights, duties and responsibilities of any company? To ensure shareholders are correctly rewarded and to act in the right way for the organisation. Part of that is to be tax efficient. That's reasonable and appropriate."

He’s wrong. As the Tax Justice Network has argued:

Companies and rich people can locate wherever they are "tax efficient". Ordinary people lose out from the process. There is a term for this: its called the Bono Defence. Named after the Irish rock musician whose band shifted its tax base from now bankrupt Ireland to the Netherlands in the name of "tax efficiency", the Bono Defence provides stark warning that tax dodging doesn't promote better economics; it promotes failed states.

That’s a big claim, but one that is justified. Those like Bono and the CBI, and others from business and the right wing who argue tax efficiency is simply tax avoidance and tax avoidance is legal and so acceptable have entirely missed (or deliberately ignored) some enormous ethical issues when making their claims. For a description of what tax avoidance (and some of the other language used here about tax) means I refer you to my blog but the big issues can easily be explained.

First, just because something is legal does not mean it is ethical. Think apartheid in South Africa or even slavery in 18th century England and move on from there.

Second, remember that when you avoid something you go round it. That’s what tax avoiders do. They go round the law. How on earth can anyone, anywhere claim that getting round the law is ethical?

But perhaps most important is the fact that a limited liability company gives its shareholders in whose interest Roger Carr says it must be run the most phenomenal economic privilege: they cannot be sued for the debts the company incurs if all goes wrong even though they get all the benefit if things go right. That’s an astonishing privilege. It is not a right. I stress, it is a  privilege — and one that is granted by parliament on behalf of the people of the UK.

The privilege carries with it at least two implicit responsibilities. The first is to account for how the privilege is used — which means putting full and proper accounts on public record so we can know exactly what our companies are up to. The second obligation is to pay for the privilege — and that means complying fully and willingly with the tax (and other) laws passed by the UK parliament that creates them using exactly the same authority that they use to grant the privilege of limited legal liability. Of course these two obligations are also related — the accounts must properly explain how much tax is paid.

In combination these observations puts paid completely and utterly to Roger Carr’s argument that the company has a duty to its shareholders to be “tax efficient”. That’s not true. It has a duty to society to be tax compliant in exchange for the benefit of limited liability granted to its shareholders.

That then requires that companies be tax compliant. Tax compliance means seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

Tax compliance is a million miles form tax avoidance. Tax avoidance is about reducing a tax bill come what may without breaking the law, and not caring who else has to pick up the bill. Tax compliance is about trying to pay the right amount of tax, but no more. The last bit is important: no one has to voluntarily pay tax. But no one has to use a tax haven or a loophole either when the result is that the tax not paid by the company and its shareholders as a result will be shifted onto ordinary working people instead (and for the pedants who say this assumes tax is a zero sum game, my answer is it certainly  looks like it is from all the evidence over recent years of tax burdens shifting from capital to labour).

So, in that case what is UK Uncut doing? In summary it seems to me it is doing three things. First  it is trying to uphold parliament and the ethics of democracy — including voluntary compliance with the rule of law. Second it’s asking that people, and especially large companies, comply with the law — and not avoid it. And thirdly it’s saying that there’s a contract between the people of the UK and the people who own companies which is implicit in the granting of limited liability and that some who use companies are acting in breach of that contract. That is unacceptable and all UK Uncut are saying is that it’s time corporate UK honoured the obligations it has to fulfil in exchange for the privilege it has been granted.

Seen in this way it’s extraordinary that anyone can object to such a campaign. If ever there was a campaign that Tories should be turning out in force to support it’s this one, largely run by young people, that demands that people comply with the law and respect parliamentary democracy.

So the real question is, if they aren’t doing that, then why not? Could it be that they’re on the side of those who are in breach of their contract with society? “


Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here: