Is tax a corporate governance matter?

Earlier today the Financial Reporting Council published the final version of the Wates Principles – a new framework for corporate governance for large UK private companies.

With corporate tax high on the public and political agenda, now is a good time to ask whether companies need to treat tax as a corporate governance matter. HMRC has certainly started to act more like a regulator (not just tax collector) in recent years, and it expects businesses to respond by changing their approach to tax risk and tax compliance.

From 1 January 2019, it will be mandatory for large private companies to state in their annual directors’ report which corporate governance code they have applied and how (explaining any departures). In practice, we expect most businesses affected by this change to adopt the Wates Principles as their corporate governance code.

For listed companies, 1 January 2019 also brings change, as the refreshed Corporate Governance Code (often referred to as the Cadbury Code) takes effect.

None of these codes makes specific reference to tax matters.

But with tax governance and tax risk currently a focus for HMRC, we have increasingly been speaking to groups about building an approach to tax matters within a wider framework for corporate governance.

We think that a corporate governance code – like today’s Wates Principles – can help companies to organise their approach to tax risk and tax governance in a strategic manner. This starts with principle one: purpose and leadership. If a board of directors can articulate the purpose of their company, or its mission or values, then they will have a starting point for leading a coherent approach to the tax-related challenges that all large businesses face.