No legal duty to avoid tax, company directors told

Company directors were yesterday warned by a top law firm that no longer can they make out it is their fiduciary duty to shareholders to pay the least tax legally possible.

Farrer & Co issued the legal opinion to every FTSE100 boss in light of them often claiming that they are legally obliged to minimise their firm’s tax payments, so shareholder returns can be maximised.

The lawyers' opinion states: “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.”

So while there is a legal duty on a director to promote the success of the company, this should not be interpreted as requiring “blinkered attention solely to maximising distributable profits.”

The opinion, which only directly applies to the UK, is likely to be seen as a setback by Google’s UK chief executive Matt Brittin, who has argued that mitigating the company’s tax liabilities falls under its obligation to shareholders.

“Legal risk in this area turns out to be a complete fiction”, reflected John Christensen, director of the Tax Justice Network, which commissioned Farrer’s opinion.

“Company directors can stand firm and act according to their consciences rather than being swayed by what is effectively sales puff coming out of the tax avoidance industry.”

According to Farrer, which counts the Queen among its clientele, UK company directors do enjoy “a wide discretion” to act with a view to the social impact of their decisions.

But, adds the legal opinion, if they choose to “pay tax responsibly rather than structure around tax, they would, in fact, be protected by the applicable law rather than at risk of liability.”

A pension investment firm, PIRC, described the opinion as a “very helpful clarification” which confirms its view that arguing that there is a legal obligation on directors to minimise the tax their companies pay is mistaken.

The firm’s managing director Alan MacDougall added: “Indeed, in the current corporate environment aggressive tax avoidance has the potential to cause significant reputational brand damage, which could be detrimental to companies and their shareholders over the long term.

“We hope that directors, and their advisers, take careful note of this opinion. It is no longer acceptable for them to seek to justify tax avoidance through a misinterpretation of directors’ duties.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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