Farrar’s legal opinion on the taxation of companies

Naturally that commercial judgment must be exercised in good faith in proper discharge of the board’s duties under s.172 Companies Act 2006. Likewise, in order for the board to discharge its duties under s.174 in such a situation, due care, skill and diligence must be exercised in such peripheral matters as selecting and instructing the tax advisers and arriving at an understanding of the options on offer. As with the duty under s.172, however, the duty under s.174 does not generally militate in favour of any specific tax outcome.

Or as we should put that.

Sure, company law doesn’t say that the directors should dodge and dive to avoid all tax. But it also doesn’t lay upon them any duty to not dodge and dive to avoid it.

I’m sure this is the part of it that the Tax Justice Network won’t be highlighting. Company law says that directors should do what they think is best when structuring matters around tax. The behaviour of, say, Google or Amazon is thus perfectly acceptable.

12 thoughts on “Farrar’s legal opinion on the taxation of companies”

  1. But if the directors choose to pay more tax than is necessary and in consequence are unable to pay their genuine creditors in full and on time they are committing a crime.

  2. In IE, your blog is a mess. The horizontal lines on the right extend across the page, and when you click on a link, you only get the link at the far right.

  3. Dom, I had that problem; try clicking on the “compatibility view” button (the one with a picture of torn paper just to the right of the address bar); that sorted it for me.

  4. Aren’t they saying that tax avoidance is just one of many competing things the directors have to consider?

    So if tax avoidance will lose them more money than they will gain (through having to remove campaigners from their head office, for example) then they shouldn’t do it, but if there’s an overall gain despite the flack then they should go ahead?

  5. Richard: yes, that’s my interpretation.

    Murphy’s take on it has always seemed to be that apologists for tax avoidance argue:

    – We have a fiduciary duty to do what’s best for shareholders
    – We’re in business, and business is all about money
    – Therefore “best” means “more money”
    – Therefore we have to make as much money for shareholders as we possibly can
    – Tax is money that shareholders don’t get
    – Therefore we must minimise tax
    – Therefore we are legally obliged to avoid tax as much as possible

    This is of course a straw man: it takes the argument to extremes.

    It would be interesting to see what brief Counsel was given, but from the opinion it looks as though they are explicitly tackling the question “is there a duty to avoid tax?”.

    I’d like to know what their opinion would be on a less loaded question, such as “What level of regard should directors have of the company’s tax bill, and to what extent if any is it appropriate to attempt to manage that liability?”

    Or perhaps to comment on the following line of reasoning:
    – We have a fiduciary duty to do what’s best for shareholders
    – We’re in business, and making money is one of the main purposes of most businesses
    – Ceteris paribus, therefore, that which makes more money is likely to be better for shareholders
    – Therefore we have to make as much money for shareholders as we reasonably can after taking other factors into account
    – Tax is money that shareholders don’t get
    – Therefore we are legally obliged to avoid incurring taxes if they could reasonably be avoided in a manner consistent with the company’s other interests

  6. And wouldn’t the directors need to consider the nature of the tax advice, whether what is being proposed is considered to be tax avoidance or merely tax mitigation, accessing available reliefs etc. If it is the former, how artificial were the underlying transactions, documentation, what is the likelihood of challenge, does it remove certainty from the postion presented to investors in the financial statements?
    Where I would differ from Pellinor – and please correct me if my inference is wrong – is the suggestion that avoidance is a unilateral decision of the Board. In my experience, the higher the degree of artificiality, the more highly flavoured as avoidance it is, the greater the likelihood of challenge. It is a continuum; not a binary decision.

  7. Reading back, I think I have done Pellinor a disservice. He does indeed include the very impprtant caveat “reasonably be avoided in a manner consistent with the company’s other interests”.
    The uncertainty created by engaging in artificial tax-driven transactions could well be inconsistent with the company’d other interests.

  8. As an individual and director, it makes perfect sense to me to so order my affairs as to minimise my personal and company tax in anyway that is legal. I do not feel any moral obligation to discover what might have been the intended spirit of tax laws nor do I feel guilty that the government’s coffers are less full than if I had not made the various tax minimising arrangements. Until governments stop fighting foreign wars, subsidising renewables, throwing money at luvvies and building pointless high speed railways, I shall continue to do all I can to reduce their income.

  9. In the comments at chez Murphy, challenged on the UNITE thing, he, once again, accidentally says what he really thinks:

    Stephen Bills says:
    September 9 2013 at 1:53 pm
    An organisation (or an individual) rakes in millions of (unearned) investment income, pays zero tax and this is considered fair/socially just?!

    Richard Murphy says:
    September 9 2013 at 2:30 pm
    It really does depend on what the organisation is doing, doesn’t it?

  10. TTG

    You see, for me, that read as “it really does depend on what [tax deductible instruments] the organisation is [using]”

  11. @ Arnald

    That’s certainly one interpretation.. but in the preceding comments he’d mentioned charities, and how “Unite owes its own existence and purpose to similar motives”.

    So I’m sticking with how I read it.

  12. @ Arnald
    I have for many years said that “I failed mind-reading ‘O’ level.” You think that you can read Murphy’s mind.
    Perhaps you can – there does not seem to be very much there to read – but if so can you explain all the contradictory claims that he publishes?

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