Tax efficiency or tax avoidance: unlike evasion, which is illegal, both efficiency and avoidance are legal and legitimate ways for companies to reduce their tax bill. But the issue is increasingly becoming a “significant moral challenge” for companies. The UK has a tax gap of £34 billion or more according to the UK tax authorities. With such astronomical shortfalls in the public account, it's an issue that is having an increasing social impact and, for companies that care about their reputation, it's becoming an important topic.

Several factors are putting tax evasion at the top of the corporate agenda. Public perception and awareness of the problem are increasing. Tax authorities are also taking an ever-more aggressive stance on enforcement. And, last year, the UK government passed the Criminal Finances Act 2017, which introduced the offence of failure to prevent the facilitation of tax evasion. CTMfile wrote about the Criminal Finances Act here: Criminal Finances Act will increase corporate risks

Higher tax expectations

Thomson Reuters recently dedicated a panel event to the topic, which saw four financial experts discuss how public opinion on tax efficiency has shifted significantly. The four panellists were: Will Fitzgibbon, lead investigative journalist on the Paradise Papers; Richard Brooks, author of the Great Tax Robbery; Louise Delahunty, partner at Cooley; and broadcaster Daisy McAndrew.

The experts noted a generational shift in attitudes, with millennials in particular having higher moral and ethical expectations of corporations and more awareness of the social impact of tax avoidance and evasion. A poll of the audience members showed that 62 per cent believe that offshore tax avoidance (as opposed to evasion) should be illegal, while the majority – 88 per cent – said there is a 'can we get away with it?' culture among corporates that practice tax avoidance.

Is tax avoidance a fluid issue?

Will Fitzgibbon, from the International Consortium of Investigative Journalists, pointed out that many entities involved in the Panama Papers and Paradise Papers showed “a sense of fluidity surrounding tax avoidance”. He said that it became apparent from studying the leaked documents that “the creators, users and enforcers of offshore tools are never 100% sure about the legality of their structures until they are tested before a court of law.”

Steps to demonstrate active tax compliance

With the Criminal Finances Act 2017's 'failure to prevent' legislation comes greater responsibility for companies to demonstrate how they have actively taken steps to avoid tax evasion. The panellists voiced concerns that companies might not be prepared to protect themselves from this offence. Companies should therefore consider taking the following steps to improve their internal tax processes:

• ensure all processes are transparent;
• ensure there are procedures in place to prevent the facilitation of tax evasion;
• have a written policy on tax procedures;
• educate staff about the issue.

Louise Delahunty, partner at law firm Cooley, said that the legal profession in particular will be affected by the offence of failure to prevent the facilitation of tax evasion. She said: “The only defence is that you have reasonable procedures in place. And so firms and companies have to show that they have good procedures and a written policy, and that they have educated their staff.”