Company directors facing scrutiny over their low corporate tax bill are not able to effectively blame their decisions on their duty to shareholders, a Farrer & Co legal opinion sent to FTSE 100 companies has said.
The opinion, sent yesterday (9 September) to the chief executives of the UK’s largest companies, was commissioned by the Tax Justice Network and concludes that ‘the idea of a strictly “fiduciary” duty to avoid tax is wholly misconceived’. The TJN, which circulated the opinion, was prompted by fears that UK business leaders are justifying their decision to find tax loopholes on the need to maximise profits for shareholders.
The opinion, primarily written by tax barrister David Quentin who has since left Farrer & Co to join Stone King, finds that there is a duty to promote the success of the company, but this should not be construed solely in the context of maximising distributable profits. ‘It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax,’ Quentin concludes.
The TJN has been engaged in a policy of persuading companies to pay their fair share of tax for many years. ‘For years we’ve been hearing from directors that it’s our duty to avoid tax. Our hands are tied,’ said John Christensen, director of the TJN.
‘Directors are given the duty to exercise sound judgement. They are not given the duty to maximise profits. The law says exercise judgement. It doesn’t say that they are under any obligation to avoid tax,’ added Richard Murphy, director of Tax Research.
The impact of this legal opinion on directors and their tax advisers alike may be far-reaching, as the pressure on corporates intensifies in the wake of the public outcry over the low tax bill of companies such as Amazon and Google.
However, one tax partner at a City firm warned: ‘If a company’s right to reduce its tax bill is sufficiently compromised, we could see the flight of companies to lower tax jurisdictions.’