I'm told that someone from the Chartered Institute of Tax has been claiming today on BBC News 24 that companies have a duty to their shareholders to avoid tax.
I really do wish people who should know better would not put forward arguments that are factually untrue. There is absolutely no such implicit or explicit obligation imposed upon the directors of any company, public or otherwise in the UK. Section 172 of the Companies Act 2006 lays out the duties directors have to their shareholders and to other parties. That section actually says:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) 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 on the community 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 is, as you will note, nothing absolute about that at all. The exercise of judgment is required, and the exercise of good faith is essential. There is of course a duty of care to the shareholders, but remember that they have no way of enforcing it: they cannot sue the director if he or she fails in their opinion to maximise profit or minimise tax. No shareholder has that right. As a result it is very clear that there is no absolute guidance to behaviour in company law.
More than that, company law explicitly suggests that companies may take into account the impact of tax avoidance on their relations with customers, tax authorities, the community and more besides. In other words - you can explicitly decide, very legally, not to tax avoid.
So might I suggest the profession stop telling mighty porkies on this issue?
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Richard to make it clear the BBC news person said companies have a fiduciary duty to minimise tax NOT the person from CIT – sorry for any confusion
God bless you, Richard. I’ve been tearing my hair out for years on this very misinformation!
Keep it up Richard, I’ll be using your fact basis analysis too, if you don’t mind of course! If enough people keep repeating this, then eventually the message will get through. I realise that it is exasperating to have to beat people over the head with it, but you have thirty years of neo liberal dogma to over turn!!
Thanks Richard, a clear outline here – and much needed by the sounds of it.
Out of interest, has there ever been any law/guidelines etc. on the duty of care/good faith responsibilities that should be held by shareholders themselves? I know they have responsibilities in running the company and keeping the directors in check, but is there anything stopping shareholders running companies into the ground for profit or pushing for ethically dubious practice?
It appears in the US, a court has decided that there is no fiduciary duty of directors to minimise tax
http://www.lexology.com/library/detail.aspx?g=a6e9e3da-f401-4bc1-b320-843c2e00c689
” There is of course a duty of care to the shareholders, but remember that they have no way of enforcing it: they cannot sue the director if he or she fails in their opinion to maximise profit or minimise tax. ”
Prior to 2006 shareholders couldn’t sue director, but post 2006 they can bring a derivative action for “an actual or proposed act or omission involving negligence default breach of duty or breach of trust by a director of the company” (section 260). So if failing to maximise profit could be shown as negligent, it appears possible that an action could be brought. (Obviously failing to minimise tax is unlikely to be negligent)