A taxing issue

Andrew Cave considers the reputational issues around tax

A taxing issue

Some years ago, Her Majesty’s Revenue & Customs ran an advertising campaign with Hector the tax inspector proclaiming that Tax doesn’t have to be taxing.

Someone forgot to tell Amazon.com, Starbucks and Google, each of which have recently got into tangles over UK tax.

HSBC, whose British consumer operation promoted itself as the listening bank when it was Midland Bank, has also not been paying attention.

These are post-recession times of austerity and taxes are making headlines, particularly when companies and wealthy people are seen to not be fully paying them.

So what do reputation management experts advise them to say and do when their tax affairs become all too public, as happened to HSBC last month when documents from 2007 leaked by a whistleblower to the BBC’s Panorama programme alleged that a Swiss subsidiary helped customers cheat the taxman out of millions of pounds.

That prompted a media storm and the resignation of former HSBC chairman and UK trade minister Lord Green as chair of the advisory council of lobby group TheCityUK.

The HSBC allegations concern tax evasion and a regulatory situation subject to Swiss, not UK, law. But there have been plenty of examples of companies criticised for domestic British corporate tax issues that involve legal tax avoidance.

IT’S ALL ABOUT TIMING

The problem, say communicators, is that the media and public treatment of such stories is highly situational, with their responses not set in stone and framed by universally-accepted rules and morality but by the prevailing economic, financial and political climate.

‘During the downturn, non-payment of corporate and personal tax became a touchstone issue, an example of how we aren’t all in it together,’ says Matt Carter, founder of campaigns and research company Message House. ‘Whilst hard-pressed families were paying their taxes, they witnessed wealthy celebrities and global multi-nationals getting away with it.

‘Tax payments are a classic issue where the company lawyer and corporate communications team fall out. What’s legal may not be right in the public mind. Companies wrap themselves in legal defences – in many cases legitimately, as the rules about corporate tax payments are archaic and riddled with holes – and yet these formal arguments do nothing to protect their reputation.’

For Carter, non-payment or underpayment of tax and aggressive avoidance strategies have become ‘the new banker’s bonus’ – an example of corporate behaviour that invokes huge public anger and resentment.

For at least as long as this climate persists, corporate tax issues and indeed the personal taxation issues of business figures carry significant reputational risks, with any incidents of appearing to bend the rules leaving businesses open to serious criticism.

The latest Sustainable Business Monitor survey by pollsters Ipsos MORI confirms the dangers of companies not behaving responsibly, with 45 per cent of consumers claiming they have reconsidered using products or services from a company that has avoided paying UK tax.

In addition, the proportion of people stating that they have staged consumer boycotts of companies or products on the grounds of poor corporate social responsibility in the past 12 months increased by seven percentage points to 23 per cent, compared to a previous survey in 2013.

Helen Lamb, associate director at Ipsos MORI, says: ‘The country may be recovering from the economic crisis but the public has not recovered emotionally. The financial crisis has cast a long shadow over British business as a whole and perceived corporate misbehaviour around tax even by a small minority further entrenches cynicism around corporate responsibility.’

MULTI-LAYERED CHALLENGES

Reputation management experts see several types of tax avoidance situations that can potentially cause problems for companies.

Charles Lewington, the former press secretary for John Major when he was prime minister, who is now managing director of consultants Hanover, says: ‘There are multinational companies with operations but not a great deal of profits in the UK that can talk to the government and explain that they are in start-up mode in the UK and creating lots of jobs here.

‘There are big US technology corporations that are using lower-tax domains, such as places like Ireland, to pay much of their taxes and may also be disrupting UK industries at the same time. That’s a much harder position to defend and they may have regulatory issues later on.

‘Then there are companies who make use of aggressive avoidance schemes through which they are doing things like booking their sales in one country but sending money across to somewhere like Luxembourg and lending it back into other parts of the business.

‘It’s perfectly legal but does lead to reputational challenges. It is also quite complicated and if you’re a business that doesn’t have a retail business it’s possible to weather the storm.’

Finally, Lewington cites private banks whose clients’ tax affairs become public due to whistleblowers. ‘As soon as it is in the public domain,’ he says, ‘you need to move very quickly to investigate the circumstances and make the case very forcibly that these things happened in a very different time and that things are different now.’

Such distinctions may not be understood by the critical British public in the current climate, however.

‘There are plenty of things that companies do with regard to taxes that are perfectly legal,’ says Rod Clayton, executive vice president of public relations group Weber Shandwick.

‘The challenge is that what people really don’t like are the laws. But instead of changing the laws, they take it out on the companies. Many companies have taken the not unreasonable position of saying that they are complying with the law and that if the law changes, they will change what they do.

‘A particular problem comes when there are events that come to light that, although they happened a long time ago, are treated as if they happened yesterday. Although they may not be remotely reflective of the company today, it’s very hard to get people to see that.

‘But most of the time, it’s hard to see really what a company can do instead, without putting themselves at a disadvantage or creating precedents that would be unfortunate.’

POLITICAL MINEFIELD

Starbucks is a famous example after it emerged two years ago that it had paid just £8.6 million in UK corporation tax since starting operations in the UK in 2006.

With UK sales starting to be affected by public protests, the group volunteered to give £20 million to the taxman over two years – a move that mystified reputation experts and led to further criticism.

However, many commentators see strong traces of politics as well as human jealousy in such public responses.

‘I think the tax issue has become exaggerated because we are in the run-up to an election,’ says Paul Downes, executive chairman for capital markets and corporate affairs at PR agency Instinctif Partners.

‘Ed Miliband in particular has sought to use it as a political football. It’s obviously had an increased focus since the crash and all the negative publicity around very well-paid bankers and bonuses and tax paid or not paid emanates from all of that.

‘That has extended into stories about corporations operating in the UK but not necessarily registered here for tax and seemingly paying very little.

‘When everybody is casting around, looking for someone to blame for the economic problems, there’s an increased level of scrutiny and companies become scapegoats for other problems.’

Andrew Wilson, a former MP in the Scottish parliament who later worked as head of group communications at Royal Bank of Scotland, is now a managing partner at strategic communications company Charlotte Street Partners.

He says: ‘We’re living through what’s going to be a very long era of reform that started just before the banking crisis and the way that institutional and public conduct has been for a long time is being challenged everywhere.

‘The normal means of engagement, which is to look to your short-term and immediate shareholder interests, is possibly not sustainable in this climate because you can end up losing your licence to operate.

‘Even if you are living within the letter of the law, if you are not living in the spirit of it that can cause enormous reputational damage.

‘With this in mind, what we’re saying to clients is to examine their purpose as institutions and to put themselves through the wringer first before someone else does and to ask themselves questions about whether their conduct is sustainable.

‘Tell the truth and recognise that this is a one-way street with governments everywhere combining to ensure that companies behave as good citizens of the countries in which they operate.’

HONESTY IS BEST POLICY

Tony Langham, chief executive of PR agency Lansons, agrees that companies need to be acutely aware of how their taxation structures and operations will be judged.

‘If you pay corporation tax at anything approaching 20 per cent, tell the world and his wife and his wife’s friends,’ he advises. ‘If you don’t, recognise that the line We pay all appropriate taxes in the jurisdictions in which we operate will not be enough for all expert audiences nowadays.

‘Taxation is an issue driven by nongovernmental organisations and selfappointed interest groups, not by consumers and voters. Come clean, tell the truth and explain context and economic and social contribution. Don’t lie, obfuscate or say that everyone else is doing it.’

Langham adds that in the current climate tax issues also rear their head if senior executives at a company are based offshore or paid via companies rather than as individuals.

Indeed, individual tax avoidance can also damage personal reputations. Wilson references the case of comedian Jimmy Carr, whose name took a battering in 2012 after The Times revealed his involvement in a tax avoidance scheme based in Jersey.

Prime Minister David Cameron criticised Carr and the comedian pulled out of the scheme and issued an apology, calling his participation a ‘terrible error of judgment’.

Individual taxation was also the subject in the long-running dispute between HMRC and Robert Gaines-Cooper, a British entrepreneur who emigrated to The Seychelles in 1976.

Gaines-Cooper visited Britain regularly, always complying with the tax laws that limit tax exiles to 90 nights a year in the UK without becoming subject to British taxes.

Yet in 1998, HMRC wrote to the entrepreneur, saying that he was liable for income tax of £30 million reaching back over a number of decades after the tax authority had issued a new interpretation of a relevant tax statute.

That case was settled for about £600,000 but HMRC also issued another claim against Gaines- Cooper that the entrepreneur contested in the High Court, the Supreme Court and European Court of Justice, losing each time, leading to negative publicity in The Times.

Ross Gow, managing partner of reputation management agency Acuity Reputation, who represents Gaines-Cooper, has taken an active approach, engaging with the newspaper, lobbying Westminster and helping his client form a legal team. Negotiations about settling the claim are still taking place with HMRC.

‘Acuity’s role was to protect the client’s reputation and promote his persona as a successful, honest and blameless entrepreneur, ensuring that his voice was heard,’ says Gow. ‘This is, after all, a man who paid tax in 16 countries and only had a tax problem in one. We crafted an educative narrative that utilised a dedicated micro-site, letters to national newspapers and opinion pieces placed in The Financial Times, The Daily Telegraph and high net worth journals.

‘The message explained the difference between ‘avoidance’ and ‘evasion’ and underscored the point that ‘tax planning’ is not only legal but unquestionably prudent.

‘It was made abundantly clear that our client was willing to pay tax that was fair and comprehensible, but not that which was unfairly and retrospectively imposed.’

Gow claims it is now understood by law-makers that predictability and fairness is key in tax matters because wealth creators who build companies, increase employment and pay tax will otherwise be actively discouraged from settling in the UK.

Other communicators are not so sure, advising clients to keep their heads down while the current climate plays out.

Whatever Hector the inspector says, tax looks likely to remain a taxing issue for years to come.