Tax and ESG

Our Tax team provides support to corporates, investors, asset managers, funds and pension schemes on a wide range of tax and ESG matters, both in respect of specific transactions and also as part of a wider package of support to individual businesses.  We have particular expertise in the following areas:

• Advice – including (i) discussing tax risks with clients in a commercial way including reputational risk and risk allocation on transactions (ii) formulating bespoke policies in relation to the corporate criminal offence of failure to prevent facilitation of tax evasion; and (iii) tax governance and 'substance' advice.
  
  
• Training – we offer training to clients across their organisations (at all levels) to understand the ‘top down’ approach to tax and ESG, and the key regimes to be aware of.
  
  
• Policies – we can advise you on the content and strategic focus of your tax policy, taking account of current considerations and the likely shape of longer term tax regulation.
  
  
• Enquiries – we can advise you during all stages of an HMRC enquiry, from advising on responses to initial requests for information (including balancing data protection and other legal obligations), to drafting responses to HMRC correspondence.
  
  
• Market knowledge – we can provide insight on the latest market practice in this sensitive and ever-changing area, and support and advice on general tax compliance and HMRC’s latest thinking and consultations. We work with our clients at a strategic level in this area to help them develop a ‘top down’ approach to tax and ESG.

Environmental taxes such as the climate change levy, landfill taxes and the aggregates levy have been around for years.  Environmental taxes can be used to encourage behaviour change by businesses and consumers.  For example, in April 2022 the UK introduced a plastic packaging tax, which is aimed at encouraging the increased use of recycled plastics.  Environmental taxes may become more prevalent as behaviour change will be required to meet the government's Net Zero targets.

Tax incentives for development of environmentally friendly technology or investment in green technology can also be used as a mechanism to change behaviour.  Currently, green tax incentives are less well developed than environmental taxes in the UK and business green tax incentives are limited to 100% capital allowances for investment in environmentally friendly technology and tax relief for remediation of contaminated land.  On the consumer side, the UK recently introduced zero VAT rating for the installation of energy saving materials in homes. The US has recently introduced a set of green tax incentives in the Inflation Reduction Act. Other jurisdictions may need to follow suit in order to compete to attract green growth industries and investment.

When viewed through the social lens, tax is a valuable contribution to society rather than a pure cost and it has become common to ask whether businesses are paying their "fair share" of tax. Businesses formulating their ESG agenda should consider the societal impact of their approach to tax, along with the reputational risks of tax avoidance.

Tax can also be used to meet specific societal aims, for example the off-payroll working rules aim to prevent to prevent the avoidance of employment taxes where workers provide their services through personal service companies.  Similarly, the soft drinks industry levy or "sugar tax" aims to reduce sugar in soft drinks and tackle childhood obesity.  Tax incentives can also be used as a lever to encourage societal objectives – in the US, the Inflation Reduction Act makes access to certain tax reliefs contingent on meeting pay conditions and the employment of a specified number of apprentices. 

Industry specific tax regimes can be used to meet specific societal aims, such as targeting particular industries that have previously benefited from state support (e.g. the bank levy) or subjecting a sector to enhanced taxation (e.g. higher rates of corporation tax on oil and gas companies or special regimes for taxation of non-residents acquiring and disposing of UK real estate).

Tax incentives can be used as a mechanism to promote societal goods such as encouraging particular industries or facilitating job creation in a geographic area.  For example, the UK has a number of different tax reliefs to support creative industries such as film production, video games and orchestras. Likewise, special tax regimes e.g. enterprise zones and free-ports can be used to attract businesses to deprived areas.

Good tax governance is an important consideration in any ESG agenda – according to the Sustainable Finance Disclosure Regulation (SFDR), tax compliance is an essential ingredient of "good governance" – itself a non-negotiable due diligence item for any funds categorised as "Article 8" or "Article 9". 

A raft of regulations have been introduced in the UK to drive good tax governance.  Some regimes give the HMRC extra tools to tackle tax evasion and aggressive tax avoidance, for example the general anti-abuse rule or "GAAR".  A notable development was the introduction of corporate criminal offences of failing to prevent the facilitation of tax evasion by a person associated with the company (e.g. an employee).  Companies will need to put in place reasonable prevention procedures in order to have a defence to these offences. More recently, the Economic Crime and Corporate Transparency Act 2023 has introduced a new corporate criminal offence of failure to prevent fraud and secondly, lowered the threshold for the attribution to a company of criminal offences committed by senior manager.  You can find out more about tax and corporate criminal offences here.

Other regimes are focussed on disclosure of information about taxpayers, to enable HMRC and other tax authorities to check whether taxpayers are paying the correct amount of tax or to provide HMRC with information to shut down schemes which are legal but lead to the avoidance of tax. Tax disclosure regimes include:

• FATCA/CRS: rules requiring financial institutions to report information about non-UK resident account holders to HMRC which is then exchanged with tax authorities across the world;
  
  
• Country by country reporting: requirement by large MNEs to submit to HMRC annual country-by-country reports on taxation.
  
  
• Tax strategy: requirement for large businesses to publish an annual tax strategy setting out their approach to UK tax risk management and tax planning.
  
  
• DAC 6 and MDR: EU and OECD rules requiring intermediaries and certain taxpayers to disclose information about arrangements which meet certain hallmarks which is then exchanged between tax authorities.
  
  
• Notification of uncertain tax treatment: large businesses are required to notify HMRC of any uncertain tax positions taken by the business, i.e. those which are contrary to HMRC's known position, or those for which a provision has been made in the business' accounts

But tax governance extends beyond regulations – it goes to the core of where a business operates and where it is taxed; if a business does not have sufficient "substance" in a jurisdiction, it may not be able to access beneficial tax regimes or double tax treaties.  The introduction of substance requirements in the Channel Islands and Isle of Man and the proposed un-shell directive in the EU (ATAD 3) means that businesses will need to give increased thought to the employees, premises and assets that they have in the jurisdictions in which their corporate vehicles are tax resident.