On directors' duties to avoid tax: the case is now closed. Move along, please
"In my opinion, the directors of a public company do have a duty to ensure that their company avoids as much tax as it sensibly can."We have seen this kind of claim in newspaper articles, on social media, and on the television - and we and our colleagues have heard it in personal conversations on numerous occasions. It is because this assertion has been so pervasive that leading thinkers such as John Kay have felt moved to write about this issue, noting (as we have repeatedly in the past) that there is no such duty, at least for the United Kingdom.
And, as was recently reported in various media outlets, we opted in the end to seek a formal legal opinion on this question from prestigious law firm Farrer & Co asking this question, about the UK. And the outcome was unequivocal: there is no positive fiduciary duty on directors to avoid tax. Again, this is true at least for the UK: we haven't done the legwork to establish it beyond doubt in other jurisdictions.
So what kind of response has our legal opinion elicited from the legal profession in particular?
We could boil this down to a few main responses. First, that we are quite right, of course. Second, that this result is unsurprising. Third, that there is of course no duty on directors not to avoid tax either. Fourth, some have asserted that "nobody ever said they did have that duty." (Well, as indicated above, that simply ain't so.) Fifth - and also incorrectly - 'still, perhaps there is still just a whiff of a duty out there somewhere . . .'
Boiling all this down, we are left with a subtle but crucial point: there is no fiduciary duty on directors either way: no duty to avoid tax, and no duty not to avoid tax (or, perhaps, no duty to avoid tax avoidance.)
To try to make a tax avoidance argument in terms of UK directors' legal duties is a category error. Case closed. Please move along, now.
And that is the most powerful result that has emerged from all of this.
David Quentin, who helped prepare the Farrer & Co opinion for us, has written about this on his blog, examining the question in more fine-grained detail, and noting that even after the legal opinion, there still appears to be a lingering whiff of the old argument out there: it's as if people, even in the legal profession, can't quite let it go.
Summarising, he notes:
It is to be hoped that this happy synthesis will eradicate from the public debate the notion that directors of UK companies have a positive legal duty to minimise tax. Indeed it may be hoped that people will stop treating “legal duties” as even relevant to the UK tax avoidance debate, since they manifestly are not.(Question of morality and justice also come into the tax avoidance debate, of course - but that's another matter. For those interested in pursuing this avenue, this could be a good place to start.)
We now reproduce David Quentin's whole blog wholesale, with his permission:
Critical response to “no fiduciary duty to avoid tax” opinion
There has been some informed critical response to the Farrer & Co “no fiduciary duty to avoid tax” opinion in the Tax Analysts Worldwide Tax Daily for 11 Sept 2013 (subscription only) and in The Law Society Gazette. There has also been an absolutely spot-on web-briefing from my former colleagues at Allen & Overy LLP (A&O), which apparently closes the door on the entire debate.
The Tax Analysts and Law Society Gazette pieces quote Rita de la Feria, professor of tax law at Durham University Law School and programme director at the Oxford University Centre for Business Taxation (RdlF), Nicholas Aleksander of the London office of Gibson Dunn & Crutcher LLP (NA), Patrick Stevens, acting head of tax policy and immediate past-president of the Chartered Institute of Taxation (PS), and Bradley Phillips, tax partner at Herbert Smith Freehills and chair of the City of London Law Society’s revenue law committee (BP).
Before embarking on the substantive discussion, I would note that a couple of commentators seem confident that this issue did not even need clarifying:
- I doubt that anyone has ever suggested that a company has a duty to its shareholders ‘to avoid tax.’ (NA)
- I am not sure that companies actually seek to justify tax planning in this way (BP)
People working in the tax justice space might raise an eyebrow at these propositions!
The broad pattern of the substantive response is considered below. In common with the approach of A&O and Farrer & Co I use the terms “avoid” and “minimise” interchangeably.
1. No positive duty to avoid tax - it is a category error
There is a general (and welcome) recognition that it is something of a category error even talking about directors’ duties in this context:
- Of course, if someone said it is your fiduciary duty to avoid tax, that’s absurd (PS)
- Whether there is a fiduciary duty is not the right question (BP)
The A&O piece goes further, however, and in three short sentences more-or-less closes the door on this entire debate:
- Very few professionals would have said that directors had a (positive) fiduciary duty to avoid tax (RdlF)
In other words the much-promulgated “duty to minimise tax” is a misstatement of what can only correctly be put as a double-negative: there is (ahem) no duty not to minimise tax.
- There is no positive duty on directors to avoid tax. This is uncontroversial but only part of the story. There is no specific duty not to avoid tax either.
Or, to put it in a simple positive proposition, there is no “duty” either way.
2. The analysis: if not doing it isn’t a breach, then doing it isn’t a duty
Again, there is general (and welcome) agreement as to the reason that the idea of a positive duty to avoid tax is a category error. A duty only bites on you if you breach it, and a properly-taken business decision either way would not not be a breach of duty. This isn’t an area where lawyers would step in and dictate a specific course of action to directors:
- So long as directors give all relevant factors proper consideration when making decisions about tax planning, and provided they can justify the decisions that they make, they should not incur liability for breach of their duties. (A&O)
- In the end, the directors may come to a view that (for example) entering into artificial tax avoidance schemes is not in the best long-term interests of the company as a whole, and in such circumstances it would be a brave shareholder who sought to challenge that decision through the English courts. Equally the directors may reach a view that the interests of the company are best served by entering into tax mitigation arrangements. But so much will depend upon the particular factual matrix that it is impossible to make any generalised statement. (NA)
- [a director’s] fiduciary duty is to look after their company as well as they can, taking numerous factors into account when considering how it should conduct its affairs (PS)
(Patrick Stevens says “if you deliberately chose not to carry out legitimate tax planning that could conceivably be a breach” but his dissent is more apparent than real. What he means by “conceivably” is that one would have to “conceive” of a specific hypothetical scenario in which the decision was a breach of duty because of some additional feature e.g. negligence or an improper objective.)
- The directors should manage the company in a way that makes sense from a business perspective (BP)
3. Directors can choose where to “draw the line”
The commentary appears to suggest that a line needs drawing:
- Some tax planning (or tax avoidance to use a more emotive term) will be likely to promote the success of the company. Some may go too far and be outweighed by other considerations. And it is up to the directors of a company to decide where to draw the line in relation to the company’s specific circumstances. (A&O)
- The difficult question to answer is what constitutes ‘reasonable tax planning’ (BP)
That line is clearly not a legal line, however. This is as everyone agrees an issue within the business discretion of directors, not the purview of the courts. And as the Farrer & Co opinion makes clear, you can draw the line very conservatively indeed and you will be expressly protected by the relevant legislation, rather than under threat from it. If there is any suggestion that directors have a positive duty to take avoidance up to some externally-demarcated “line”, then the debate would be going round in circles. Everyone agrees there is no such positive duty.
- The question remains - ‘where do you draw the line?’ (PS)
4. The erroneous idea of a positive duty might still linger
Despite all the foregoing, a whiff remains of the (now I think completely exploded) idea of a positive duty:
- What is often argued is that in many jurisdictions, including the UK, directors have a duty (fiduciary or statutory) to act in the interests of the company, which in many cases — although not always — means minimising its tax liability (RdlF)
Considering those statements in turn:
- The directors have a duty to promote the success of the company. One measure of success (but not the only one) is the post-tax profits of the company — and one aspect of maximising post-tax profits is minimising tax. (NA)
Those who present the argument to which RdlF refers may say that minimising tax is generally in the interests of companies, but presumably they are not suggesting that a UK company legitimately choosing to not minimise tax would thereby put its board at risk of proceedings under a directors’ duties rubric. As NA says, “it would be a brave shareholder who sought to challenge that decision through the English courts”. This argument appears therefore to be more in the nature of a business recommendation than a proposition of law.
Likewise post-tax profits may be “one” measure of a company’s success, but presumably NA would not want to be understood as suggesting that a UK court would adopt that measure in order to found liability under s.172 Companies Act 2006. Indeed the idea that a court might intervene in a business decision on the basis of some kind of simplistic performance metric along those lines is the reason why actual practitioners in the area of directors’ duties find the idea of a “duty to minimise tax” so preposterous.
It is very easy to mistake a double-negative for a positive - even some of the commentary on the Farrer & Co opinion itself could be construed as having made that error. It is really only A&O’s commentary that has got to the heart of the issue. The position is now, however, absolutely clear:
(i) Farrer & Co say there is no duty to avoid tax
(ii) A&O agree but add that there is no duty not to, either
(iii) So there is no positive duty either way - directors can “draw the line” where they see fit
It is to be hoped that this happy synthesis will eradicate from the public debate the notion that directors of UK companies have a positive legal duty to minimise tax. Indeed it may be hoped that people will stop treating “legal duties” as even relevant to the UK tax avoidance debate, since they manifestly are not. The steps that companies take to minimise tax are volitional business decisions, not legal obligations.