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Tax mentions in FTSE 100 annual reports highlight transparency drive

Berwin Leighton Paisner (BLP) has analysed the number of mentions of the word “tax” in FTSE 100 companies’ 2010/11 annual reports, finding a substantial increase compared with 2005/6.

The research suggests companies are going to greater lengths than ever when it comes to explaining their tax affairs. However, a tipping point may have been reached, as taxpayers feel even greater disclosures would be unhelpful.

The annual reports of 96 businesses (those listed on the FTSE 100 index in both 2005/6 and 2010/11) were analysed as part of BLP’s research.

The law firm made the following conclusions:

- More than 80% of the 96 businesses analysed saw an increase in the level of tax reporting contained in their annual reports across the five-year period;

- Mentions of the word “tax” increased by 63% in the period, with the greatest increase coming in the financial services sector. Companies in that sector mentioned “tax” almost three times more than they did in 2005/6, a 380% rise;

- There has been a significantly higher increase among B2B brands (average of 69%) compared to consumer-facing companies (25%), suggesting public pressure on high street brands is not the only factor at play; and

- Tax is also now referred to more frequently in statements relating to corporate responsibility and the contribution companies make to the UK economy.

BLP identifies growing expectations on corporates to be open and transparent about the way they structure tax affairs as one cause for the increase in mentions of “tax” in annual reports. The increasing complexity of the tax regime, and a growing need to provide country-by-country breakdowns of where taxes are paid, is another probable cause.

“While this is a simple litmus test, not forensic accountancy, the results are a useful yardstick and indicate how tax has risen up both the boardroom and public agenda in recent years,” said John Overs, BLP’s head of corporate tax. “This has been driven by pressure on companies from government, investors, and increasingly the general public, to be more transparent and more comprehensive in their reporting.”

“It also hints at the increasing complexity of the UK tax code, which grows longer with each year that passes. Every reform, from aggressive anti-avoidance measures to positive tax incentives, adds to the burden on companies to comply and now to account more openly about their actions,” added Overs.

Given that the findings analysed annual reports published before the prominent attacks on companies such as Google, Amazon and Starbucks by the parliamentary Public Accounts Committee (PAC) and tax justice campaigners, the number of mentions in next year’s annual reports is likely to be even higher still.

However, BLP warned that while greater explanation may be well-intentioned, increasingly detailed breakdowns could serve to confuse or obscure, rather than illuminate, the reality of how a business is performing.

McPartland tax challenge

Such concerns over the benefits attached to greater disclosure are echoed by a number of companies that recently responded to Conservative MP Stephen McPartland’s tax transparency campaign.

McPartland is calling for greater transparency through the adoption of country-by-country reporting (CBCR). But the responses of most companies indicate that a requirement for more detailed breakdowns of companies’ tax information would not be welcomed. Rupert Soames, chief executive officer at Aggreko, described the idea as “lousy” and “unworkable”.

“We are already facing an uphill battle to keep our annual reports useful to, and readable by, investors; including the information you ask for would be completely unpractical,” said Soames.

“We would not support imposing further accounting standards in this area as this would impose unnecessary burdens and complexity in reporting and will not solve the issue we understand it aims to address,” said Simon Barratt, general counsel at Whitbread. “Imposing unnecessary regulations on all companies, the vast majority of which follow the letter and spirit of legislation, to highlight the few is not appropriate or fair.”

While Ian Springett, chief executive officer at Tullow Oil, said a new measure for disclosing tax information on a country-by-country basis would be unnecessary.

“Given these existing initiatives [EITI, Dodd-Frank, proposed amendments to the EU Transparency Directive] and the momentum being created around them...a new international accountancy standard would, for a company in Tullow’s sector and areas of operation, seem unnecessary at the moment.”

And Rick Medlock, chief financial officer at Immarsat, said country-by-country disclosures would provide information that is “of little relevance to the vast majority of our shareholders and other stakeholders”, adding that the existing annual report is already “overly long” and burdensome.

Some respondents have reacted positively to the suggestion, including Capita’s group finance director Gordon Hurst, who said “Capita is both comfortable and supportive of your interest in establishing a new international accounting standard”. However, positive responses invariably contained caveats such as there not being a disproportionate increase in the compliance burden or, as ITV’s Ian Griffiths mentioned, universal implementation (not just confined to the UK).

Companies in the FTSE 100 in both 2005/6 and 2010/11, broken down by sector based on the categorisation used by the Financial Times, and showing the average percentage increase in mentions of “tax”:

Sector

Based on the Financial Times categorisation

No. of companies

Average % Increase

Banks

5

23.3

Financial Services

4

380.3

Aerospace & Defence

2

18.5

Automobiles and Parts

1

34.8

Food and Beverages

5

32.8

House, Leisure and Personal Goods

1

50.4

Industrial Engineering

3

32.9

Insurance

8

34.3

Industrial General

1

50

Oil & Gas

9

49.6

Media

5

23.5

Mining

10

147.5

Pharmaceuticals and Biotech

4

36.6

Real Estate

4

56.7

Retailers

6

43.2

Support Services

10

28.5

Tech - Hardware

1

-42

Tech - Software and Services

1

80

Telecommunications

3

16.6

Tobacco

2

59.3

Travel and Leisure

5

48.5

Utilities

6

52.5

Source: Berwin Leighton Paisner

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