Ethical issues for a tax advisor

Following Labour’s first UK Budget in 14 years, debate continues to reverberate, largely focussed on the impact of the rise in employer National Insurance (NI).

Many sectors – such as health (including GPs and hospices) and hospitality  – have appealed for exemption from that rise to avoid closure or fundamental changes to their business models. They cite the knock-on impact on employment, workers’ long-term rewards and profitability for investors.

Underpinning those short-term questions is a more fundamental issue: how businesses, and corporates in particular, should be taxed in the 21sth century.

Despite its name, “employer’s NI” is actually based on the characteristics of individual employees – and the interaction between thresholds, rates and taxpayer funded income support measures that can all combine to create an incentive for employers to manage down individual workers' hours so as to reduce exposure - even though that then puts each individual, below aggregate living wage for the year.

Increasing the rate of NI enhances that incentive, and the potential financial advantage over competitors of exploiting this feature of the system. But it also creates a moral dilemma for the ethical tax adviser, concerned about exploitation of the workforce, or the income support systems which make it possible.

As an ethical issue for a tax adviser it might seem a long way from the more commonly discussed issues around tax avoidance schemes, offshore structuring and aggressive mitigation strategies, but they all link back to the tensions and challenges of corporate taxation; themes underpinning the latest release of ACCA’s policy document, Global policy on taxation of companies: Principles and practices.

I can’t claim for certain that the Chancellor read the paper before penning her Budget – although ACCA has useful discussions with HM Treasury officials on many of the key themes of the paper. Those themes may soon become more pressing for the Chancellor – and indeed for governments across the globe. The current focus of tax systems across the world on financial profits is vulnerable on several levels, as evidenced by attempts at countermeasures like the OECD BEPS (Base erosion and profit shifting) and Pillar 1 and 2 initiatives.

Could it make more sense to tax business on how they make their profits (which has direct real-world impacts), than how much profit they make (which is a function of accounting standards with, often unintended, real world impacts)? 

The current focus is on taxing what’s measurable – corporate profits, which are reported to other important stakeholders, and form a solid base for tax authorities to work from. But taxing profits without considering how those profits are made, favours those businesses that can take advantage of negative externalities – outcomes of business behaviour that are not reflected in results measured by current reporting standards- to reduce their operating costs.

Directly taxing behaviours with negative impacts, such as profligate use of water, energy or carbon-intensive resources that are taxed directly, will create an incentive for businesses to find models that consume these assets less. All too often today, businesses can harm the local environment without bearing any costs of clean-up or remediation. 

Qualified tax advisers and financial professionals have to operate under ethical codes. The focus though has historically been on tackling the grey areas introduced by the reliance on the patchwork of different accounting standards and tax rules.

Since 2014 ACCA’s Global Policy on taxation of companies: principles and practices has said the role of tax professionals should go beyond advising businesses against doing what is unlawful and undesirable and should extend to identifying necessary changes to make the tax system work for the wider good of society.

Companies have a commercial imperative, but ACCA believes that they also have a wider responsibility to be good corporate citizens. They need to consider the wider impacts of their tax policies and recognise that some approaches to tax (like minimising NI at the expense of employees’ wage levels), will be seen by some people as unethical even if they are legal.

If we want businesses to support sustainable development (and our research suggests that’s certainly what the voting public wants PI-PTIT-2023 v4.pdf ), future governments must look beyond profit as the basis of taxing companies and consider their impacts on the environment and society.

New sustainability reporting and assurance standards will support a shift to more sustainable taxes as well as reinforcing the role that businesses play in society beyond simply paying taxes.

‘The accountancy profession is, and should be, part of the solution. Professional accountants need to continue their work with policymakers to develop approaches that work for business and meet society’s wider needs. While debate will continue, the heart of the matter is whether tax rules, especially for corporates, reflect the new business models of the 21st century and consumers’ wider ethical expectations.

Main image: Jason Piper, head of tax and business law