The meeting of tax and reputation management

When Lewis Hamilton posted a picture of his new private jet to five million Instagram followers in 2014, the VAT arrangement on the purchase was probably the last thing on his mind. He had followed the advice of his advisers and the Isle of Man government had approved the VAT rebate.

Three years later, this image would make him the face of the Paradise Papers, the latest tax avoidance scandal which has implicated everyone from Bono to Apple. Tax and reputation management were once complete strangers to one another. Tax advisers buried themselves in intricate schemes, safe in the knowledge that avoidance was entirely legal while evasion was to be avoided. However, in the last four years, a wave of offshore data thefts has made the once dry subject of tax the subject of front page news, as well as being a cause for moral outrage across the political spectrum. In the aftermath of these scandals, it is safe to say that anyone with wealth or status should consider both the financial and the reputational implications of their tax arrangements before embarking on an offshore scheme.

Tax avoidance has been a hot topic in politics and journalism since 2012, when George Osborne pronounced in his Budget speech that he regarded 'tax evasion and – indeed – aggressive tax avoidance as morally repugnant'. Osborne's intervention evidenced a sea change in HMRC's attitude to tax avoidance, no doubt partly due to political considerations, but also financial ones. The other game changer, which may have strongly influenced Osborne, took place three days before his 2012 Budget speech. The United States passed into law the Foreign Account Tax Compliance Act (FATCA), stretching the reach of the Inland Revenue Service not just to US citizens living abroad, but also to foreign institutions, requiring them to report to the IRS on US citizen clients.

One year later, in April 2013, the first major international tax "leak" hit the press, when over 120,000 companies and trusts were exposed in offshore hideaways by the International Consortium of Investigative Journalists (ICIJ). This was followed by further leaks exposing tax avoidance schemes in Luxembourg and Switzerland in 2014 and 2015, also by the ICIJ. These were dwarfed in scale and significance by the Panama and Paradise Papers data thefts, both of which have ensured that one's tax arrangements are now a serious risk to one's reputation.

The other key factor is that wealth itself has become the new celebrity. It opens doors to publicity, whether it is wanted or not. Extreme wealth became more prevalent in the recession, with the gap between the ultra-wealthy and everyone else growing exponentially. At the same time, a global financial crisis was laid at the door of bankers who retained their wealth, while the world struggled to come to terms with the consequences of their mistakes. As a result, the catalysts for revolutionary change in how society viewed meeting one's tax obligations aligned themselves beautifully. Consequently, reputation management has become an essential consideration in assessing tax risks.

The information age

It is unsurprising that tax avoidance has become a favourite topic of the press. Being wealthy in recessionary times was bad enough; seemingly not paying your dues was unforgiveable. Whilst most offshore leaks are the result of illegal data breaches, reports on the stolen information are in effect protected by public interest in the subject of tax avoidance, both in respect of wealthy individuals and for those multi-nationals who seemingly seek to minimise their tax liabilities. Corporate 'fat cats', non-doms, foreign corporations and well known, wealthy individuals have become very acceptable public targets, in part because of the numbers involved, despite it being the case mostly that they have done nothing illegal, but also because no one really wishes to be seen to be challenging the publication of otherwise confidential information.

Prior to March 2012, high net worth individuals and large corporations would have made business and financial decisions based upon a variety of factors, such as wealth generation and protection, organisational planning and, of course, tax efficiency. They are less likely to have considered – or be advised upon – the potential reputational harm of their decisions. In the information age, leaked and stolen documents which reveal the confidential financial arrangements of high profile individuals have become rich pickings.

These individuals were often following the advice of their advisers, who told them only of the great opportunities to reduce their large tax bills. No mention was made of the risk of these documents falling into public hands, where the schemes would be deemed, at best, morally repugnant; at worst, illegal. The presence of a public interest argument, even if untested, and the multi-jurisdictional nature of the publication makes it difficult to prevent publication on the grounds of privacy or misuse of private information and the higher the individual's profile, the more newsworthy the story.

Passing judgment

Back in 2012 when it was film schemes that were being scrutinised by HMRC, the First-tier Tribunal heard an application by Chris Moyles, the former Radio 1 DJ (Mr A v HMRC [2012] UKFTT 541 (TC)). He requested that his appeal of an HMRC decision against him which related to a tax avoidance scheme be heard in private and anonymised, so as to avoid adverse media coverage. He argued that press coverage would damage his career and earning capacity.

The judge dismissed the application, quoting Judge Henderson's comments in HMRC v Banerjee (No. 2) [2009] STC 1930:

'In my opinion any taxpayer has a reasonable expectation of privacy in relation to his financial and fiscal affairs, and it is important that this basic principle should not be whittled away. However, the principle of public justice is an important one ... and ... it will only be in truly exceptional circumstances that a taxpayer's rights to privacy and confidentiality could properly prevail in the balancing exercise that the court has to perform.'

The judge concluded that the fact that a taxpayer is rich or in the public eye is not a reason to adopt a different approach; as it would give rise to the suspicion that different rules applied to them.

Perhaps of even greater resonance was the decision in 2013 of Mr Justice Sales in Ingenious Holdings v HMRC [2013] EWHC 3258, in a judicial review application against HMRC's decision to disclose information about them in an 'off the record' briefing to journalists of The Times. The claimants alleged a breach of the confidentiality obligations owed by the HMRC under CRCA 2005 s18; as well as privacy and a right to a fair trial under the ECHR. Sales J dismissed the claimants' application concluding that:

'it is legitimate for HMRC to seek to maintain good and co-operative relations with the press. The efficient and effective collection of tax ... is a matter of obvious public interest and concern. Coverage in the press about such matters is vital as a way of informing public debate ... which is strongly in the public interest in a well-functioning democracy.'

As one would expect, this is difficult in reality to challenge, not least in the present climate. It also strengthened the public interest argument in support of publicity, something most individuals and corporate tax payers would wish to avoid.

Attempts to prevent publication through the courts seem even more futile in the wake of last year's PJS injunction (PJS v News Group Newspapers Ltd [2016] UKSC 26) and the infamous David Beckham hack of February 2017. In both cases, injunctions were granted by the courts. In both cases, the stories were leaked anyway by foreign press, with the injunctions themselves only adding to the story.

How to deal with the breaking story

There is no doubt that the current climate is one of transparency. If the worst does happen, be prepared for public scrutiny and anticipate moral (if ill informed) media coverage and judgments of talking heads. It is key to balance potential tax benefits verses reputational harm to the taxpayer, family, related businesses, stakeholders and even advisers. It is now essential to consider how decisions taken today may be viewed in the future.

For those considering taking a reputational risk in return for seemingly greater financial reward, advance crisis planning should form part of the package. Bear in mind that news is now permanent and global. It is no longer about having one bad press day and moving on. The story is likely to remain online forever. How much each taxpayer is willing to trade financial savings today for a reputation tomorrow is highly personal, but advisers should open taxpayer's eyes to the risks. The ability to injunct a tax story is extremely remote. However, if the facts are with you, it is possible to argue your way legitimately out of the publicity; there is no public interest in the public being misled by an untrue story.

If a story cannot be stopped, then damage limitation usually means reducing the impact of the story by getting the facts straight, avoiding reports that are false or mere conjecture, and openly responding to the remainder. 'No comment' is rarely the best option and will typically be read as guilt.

It is also important to remember that journalists are unlikely to be interested in what leading counsel sees as the key point. Lewis Hamilton's response that the VAT scheme was approved by a tax barrister has done little to placate the media. Before you engage with the media, you need to know how to deal with a journalist.

Unsurprisingly, prior planning and obtaining the right advice, sooner rather than later, is essential. It is rarely possible to stop a story at a moment's notice. A little preparation can go a long way.

If you require further information on anything covered in this briefing please contact Julian Pike or your usual contact at the firm on 020 3375 7000.

This publication is a general summary. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2017