Today sees the relaunch of the Fair Tax Mark of which I am the technical director.
As many readers of this blog will know, I was involved with the launch of a trial version of the Fair Tax Mark last summer. For a number of, mainly personal, reasons we could not take work on the Mark forward as fast as we wanted last summer so, instead, those involved took time to reflect on what had been achieved, listen to and reflect on criticism and comments made and to then reconsider the next best steps. That process has lead to the changes reflected in todays relaunch.
That there is a need for a Fair Tax Mark is obvious. If 2012 was the year of tax hysteria and 2013 was the year when grand promises were made then 2014 has to be the year of delivery. Many within the tax profession might think that the OECD's BEPS process is the source of hope in this respect but the public wants signs of action too. That was clear, for example, when in November 2013 the Institute of Business Ethics reported that:
Worries about tax avoidance have shot to the top of public concerns about business behaviour, replacing executive remuneration by a wide margin, according to the latest survey of public opinion conducted for the Institute of Business Ethics by IPSOS Mori.
This is where the Fair Tax Mark comes into play. People have now got used to hearing stories about companies who are tax abusing. What they now want to know is who they can trust on this issue. So, just as the Fair Trade Mark was created to tell consumers which companies were acting ethically within their supply chains, so the Fair Tax Mark has been designed to identify companies that are playing fair with their taxes.
The Fair Tax Mark's guiding principles are firstly that a company should pay the right amount of corporation tax (but no more) in the right place at the right time according to the spirit of the law of the jurisdiction in question and secondly that a company should be capable of being held to account on its tax behaviour by the public based on the information it chooses to publish.
The difference between the Fair Tax Mark and others in this area is that we do not think that warm words of comfort from corporate PR departments on tax compliance are now enough; we want to see these principles evidenced in action, and most particularly in the accounts that companies publish.
This last point is vital. The simple fact is that the tax reporting of most companies is now almost incomprehensible. Whilst our ambitions are big, and include country-by-country reporting for multinational corporations, we are starting with UK based companies and the SME sector.
In that sector our goal is firstly publication of a full set of accounts (abbreviated accounts will not do, of course) and that those accounts have to impart meaningful information. So, for example, we expect the company to be clear about who owns and manages it, where it trades and what it does. In the case of many SMEs this is information that is not always easy to secure.
Having reached these base-marks we then expect the company to have a clear policy on taxation either in its accounts or on its web site and that this should clearly state that it will not avoid tax. We give bonus marks for confirmation that the company will not use tax havens for tax purpose and that it will not use schemes that might be subject to the GAAR or DOTAS or which lack economic substance.
However, perhaps the biggest challenge for most companies and their accountants will be that we expect companies to explain the tax that they pay. This means that the current tax charge in their accounts has to be separately reconciled to declared profits before a separate deferred tax reconciliation is provided. We also expect a narrative description of the reconciling items as well a numeric data on these points. To help users we are publishing example notes to make clear just what we mean when saying this.
The reason for such disclosure demands is that we think that many, and perhaps most, users of financial statements, including the shareholders of many SMEs, simply do not understand why and when the companies they engage with are paying tax, and what bills might lie around the corner hidden in the deferred tax liability.
After all that a surprisingly small number of marks are awarded depending on the tax rate the company pays. To highlight that our emphasis is on disclosure, if the explanation is appropriate a company can get a Fair Tax Mark and pay no tax at all. After all, we have to recognise losses happen.
So why do we think this matters? Simply because we believe that the time for clarity on tax has arrived and that if we have it those companies that are doing the right thing can both prove it and be rewarded for doing so, which is why we're rather hoping that many companies will want to apply for the Fair Tax Mark and that their accountants will see the Fair Tax Mark as a value added service they can supply to their clients.
There is, of course, much more on our website at fairtaxmark.net including details of our pioneer companies, the Midcounties Co-op, Unity Trust Bank and the Phone Co-op.
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A qualified good idea. The criteria actively penalize SME’s who reduce their tax below the mainstream rate through investing in “permanent” differences such as R&D, Patenting, Land Remediation, Share Based Payments, Creative Sector activities etc etc – so they will discourage companies who are actively pursuing commercially worthwhile activities which the Government are encouraging. Refining the criteria to make it clear that full points will be awarded if a failure to hit the mainstream rate is due to permanent enhanced reliefs would be helpful.
Also – the fees will put a lot of my clients off!
Alastair Wilson, Tax Partner and believer that good tax advice can be DOTAS and GAAR free.
Alastair
Thanks for comments
If you read the criteria you need 13 marks to get a FTM
If you pay no tax at all you can get 18 marks out of 20 so need never put such companies off
As for fees – we can do an SME for £200 – less than many ads they’ll pay for
Also open to sharing a fee with practitioners if they do all the checking
Want to discuss?
Richard
I agree with Alastair. If a company is not engaged in tax avoidance, and is providing full disclosure, isn’t that sufficient? Why is its effective rate of any relevance at all, given that it is a function of statutory exemptions and reliefs? Manufacturing and research/development companies will almost always have an effective rate significantly less than the headline rate due to the various capital allowances that will apply – yet this clearly has nothing to do with tax avoidance.
On a more practical level, I can see many small businesses would be concerned that the cost of preparing the necessary disclosure will be too great. It might help if you provided a worked example of the kind of disclosure you have in mind, so people can assess how much work it actually is.
This is about showing a company a company is not engaged in tax avoidance, and is providing full disclosure
Indeed. can I ask you – what is wrong with that?
As for the examples – all are available on the Fair Tax Mark web site for download – even in excel format that many will use.
I think we anticipated all your comments
Then why do you penalise a company for having a low effective tax rate as a result of capital allowances etc?
We don’t penalise them
We expect them to explain it
And they can get a Fair Tax Mark despite it
They can’t if they don’t explain it though – and that seems to us entirely reasonable and the key to this issue
You do penalise it – you award points based on closeness to the statutory rate. A company with a low effective rate can claw some of this back if it explains why, but not all of it.
Why?
And do you honestly think anyone would think it credible if we did otherwise?
Serious question
We could not
But nor have we prevented anyone getting a mark
I completely disagree. In suggesting there is something per se wrong with a company having a low effective tax rate you lose credibility.
We will have to agree to differ
I am very comfortable that we have got it right
But why? Why do you think there is something wrong in a company having a low tax rate just because it benefits from statutory reliefs/exemptions/allowances? Merely asserting your position is not very persuasive.
We don’t
Which is why a balance was struck on the issue
I was wondering what would happen if two companies with >10m turnover both in the same industry and both with exactly the same accounts which match the FTM criteria .
Company A decides to stump up £4k per year for the license to use the mark & Company B does not. The FTM publicity then starts promoting Company A, as does Lady Hodge & various other supporters, (e.g.this company has a FTM – don’t deal with those that don’t) which, whilst not implicitly stated is clearly the intention. Thus causing issues for Company B.
Will this not end up in Court with people being sued by Company B, who, after all have broken no laws, complied with the FTM requirements, but just not paid to have the FT Mark.
Just as the Fair Trade Mark is open to any company to apply for so is the Fair Tax Mark
Just as is a Investors in People and many other schemes
I am having some difficulty working out the basis for your objection in a free market system
I haven’t objected. I’m asking whether your group has considered this.
If I was running Company B I’d be less than pleased if people started implying that there was something dodgy, or we were not as trustworthy. Particularly as your group is self appointed, sets it’s own rules & then gets a senior MP to support it.
Have you ever heard of the market and choice?
We’re not barring anyone
I do not think we’ll be worrying ourselves about your hypothesis but thanks for offering it
Am I right in thinking that the Fair Tax Mark only applies to the company’s corporation tax liability and not the use of the company in personal tax planning?
So someone running a business through a company and taking out profits as dividends to save NIC, or giving shares to family members to split income and benefit from personal allowances/lower tax rates (both techniques you have condemned in the past) would get the Fair Tax Mark without question?
If there is evidence an abusive scheme e.g.an EBT is being used then it would fail
We discussed dividend schemes. Since the government refuses to block them and the GAAR specifically does not apply we think there is little we can do to challenge a scheme that appears quite explicitly to be legal