Editor's view: a question of judgement

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At the heart of much of the current debate around tax, and in particular the debates on the amount of corporation tax paid by some of the world’s largest businesses, has been the grey area where morality bumps up against legislation

Should directors be acting to the letter or the spirit of the law? “I was just following the rules” is an old and popular defence, and one employed not very successfully by MPs during the expenses scandal in 2009. The same trick is used as part of the debate on executive pay. Criticisms of rewards for failure are brushed away with claims that the latest eye-watering payout to a departing CEO is merely in line with the terms of employment in a contract. The letter of the law has the power to make an ass of common sense.

This subject cropped up earlier this week at the London Business School’s Global Leadership Summit 2013. Titled Beyond Heroes, Villains and Scapegoats: The Future of Leadership, delegates heard plenty of discussion of the need to apply greater discretion in their behaviours and decisions.

One concept in particular stood out: the importance of good judgement. Martin Wheatley, CEO of the new banking regulator the Financial Conduct Authority, spoke about the UK’s revised approach to financial regulation. He pointed out that the new regime represents a marked shift away from the era of light-touch regulation and claimed we have entered an era when regulation (especially for financial services) will be more intrusive. Crucially, he also pointed out that the new system inherently involves the exercise of judgement (both from regulators and those regulated) rather than compliance with rules.

The letter of the law has the power to make an ass of common sense

Meanwhile Dr Josef Ackerman, chairman of Zurich Insurance Group and vice-chairman of the Foundation Board of the World Economic Forum, went further claiming that while the financial crisis was caused in large part by poor decision-making and errors of judgement by the banks, the situation was compounded rather than eased by errors of judgement on the part of the authorities trying to patch things up. When governments, in particular in the US and UK, absorbed failed banks into successful banks or bailed out failing banks they kept alive organisations that shouldn’t have been kept alive.

“We should have used the crash to reconfigure the banking system. Failed banks have to be allowed to exit the market,” he said.

This failure to allow the market to correct is partly what has caused the long recession, as banks with badly mangled balance sheets are told to hold on to more capital to prevent a similar crisis in the future. And the recession led to austerity, which in turn has placed the spotlight more than ever on the role of tax. Which gets us back again to the question of judgement.

Also at the LBS Summit, Tim Breedon, recently appointed to the board of Barclays as a non-executive director, offered insights into the importance of judgement in good leadership and culture. The new team at Barclays is clearly determined to build a better corporate culture in which the exercise of good judgement matters and is seen to matter. Breedon explained that this means both doing the right things and doing things right.

But the issue of the role of corporate tax in general and corporation tax in particular has stayed at the top of the political and news agenda and shows few signs of disappearing soon. Sadly, the rise in public and political interest in tax has not been accompanied by a rise in understanding of what are often highly complex affairs. But what is clear is that rather than complying with a set of rules (and sometimes pushing those rules to their limit), tax is increasingly becoming a matter of judgement.

The stakes for tax professionals and finance directors have never been higher

In some ways it always has been. The extent to which companies and individuals employ techniques to reduce the tax they pay is nothing more than judgement.

But this judgement becomes more critical as the reputational risks of not being seen to contribute a decent or fair amount of tax grow. For a while in the heady days of the boom years, when employees seemed to be scarcer than jobs, organisations boasted of becoming the “employer of choice” in a sector. Picky would-be employees searched out a future employer who suited their values and beliefs. Today that includes their tax contributions (perceived or actual).

The same is true of customers. Even in austere times, shoppers today align themselves to brands whose values they share more than ever.

All of which means companies that develop a reputation (deserved or otherwise) for not contributing “a fair share” (and anyone able to pin that concept down accurately is doing well) may struggle to find employees or keep customers. Needless to say in the age of social media acquiring a bad reputation can happen quickly and without much justification.

Thus the stakes for tax professionals and finance directors have never been higher. That alone should be enough to change the rules of the tax game forever. And as uncomfortable as it may be for some tax experts, it will no longer be a question of simply following the rules, but rather one of making the right judgements.

 


 

Richard Cree Richard Cree is editor of economia

 


 

 

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  • Comment by Martin Holland

    It's interesting that the only cases where companies have felt compelled to re-arrange their tax affairs has been where consumer pressure (rather than pressure from politicians) has been predominant. E.g. Starbucks. An excellent example of the power of a free market, I would say.

  • Comment by Anonymous

    What happened to the public interest? Acting to benefit a client or group of clients at the expense of the wider community is to act against the public interest. Admittedly there is no formal definition but I've always found that to be a sound principle. After several years of consultation the ICAEW's executive was unable to establish a definition of "acting in the public interest". The very same executive is required to act in the public interest! Interpreting the law to one's own advantage or to benefit clients at the expense of the wider community is against the public interest and should be banned by any chartered or professional body.

  • Comment by chris Try

    Whithall wrote the tax rules. Parliament passed them. The law is the law. The law has to be obeyed. So about these "judgements" that you say have to be made, are they to pay more tax than the law says is due, or are they to pay less tax? If the law is not obeyed, we get anarchy. And what we have, re tax, right now is masses of badly authored tax law, badly authored tax law written by Whitehall and made into law by Parliament. And those responsible for this mess, the architects of it, complain when their laws are obeyed and the result seems peverse. Those complaining MP's are actually saying that their collective "clan" have failed and it has. And they are still at it. Look at "cash accounting". It makes tax an avoidable expense for about 3.5 million businesses. They have been told that this is the outcome of their plans yet they persist. So when little businessess become mass tax avoiders, who is to blame? The businesses, or the fools who made the stupid and unneeded new laws?