In a difficult macro environment in which disposable incomes are stretched, where consumers choose to spend their money becomes ever more important, as does the reasons behind their choices.
Figures from The Share Centre’s August Profit Watch UK report shows that consumer services saw revenues increase by just 1.5 per cent for the 12 months to the end of March, in spite of strong inflation. General retailers, meanwhile, saw their collective sales drop 0.4 per cent year-on-year, which the report attributes partly to weak consumer spending.
In addition, profits for these two sectors have also struggled with consumer services gross profits shrinking 1.4 per cent year-on-year, while general retailer profits were ‘roughly in line’ with the previous year.
With profit and sales of these companies highly dependent on the consumer, issues or events that could affect the brand and reputation of a company may potentially end up affecting the bottom line and the investability of a firm.
An example of this has been the UK corporate tax controversy, highlighted by the UK Public Accounts Committee in November 2012 when it requested representatives from US firms Starbucks, Google and Amazon to give evidence on why the companies had not paid as much tax as they should.
But Anne Fraser, head of corporate governance at Swip, notes: “The debate on tax management is not just relevant to consumer companies. It is applicable across the market and, as investors, we recognise that a company’s tax policy can give rise to potentially significant reputational and commercial risks.”
At the time, the outraged reaction to the perceived tax avoidance caused groups such as UK Uncut to organise protests against Starbucks. This led to Starbucks committing to pay a significant amount of tax during 2013 and 2014 regardless of whether the company is profitable.
In an open letter in December 2012, Kris Engskov, managing director Starbucks Coffee Company UK, stated: “We’re taking action to pay corporation tax in the UK – above what is currently required by tax law. Since Starbucks was founded in 1971, we have learned it is vital to listen closely to our customers – and that acting responsibly makes good business sense.
“Over more than 14 years, we’ve been in business here in the UK, the most important asset we have built is trust.”
The actions of Starbucks highlight the importance placed on a good reputation, and although Amazon and Google have not made a similar commitment, in the hearing at the Public Accounts Committee, the Google representative noted the business is “completely built on the trust of our customers” while Amazon’s representative stated: “We are a company that is 100 per cent focused on our customers.”
But do these issues really affect the perception of investors in companies such as these? Ryan Smith, head of corporate governance & SRI at Kames, says: “Tax avoidance is a complicated issue for investors. Tax efficiency, done legally, can serve to bolster profitability – at least in the short term. However, there are also potential reputational and commercial risks for companies that are in fact, or perceived to be, abusing legitimate tax obligations.
“Short-term benefits of tax efficiency might have longer-term commercial consequences by negatively affecting brand value and stakeholder relations that are critical for a company’s long-term success. In the extreme, it could affect license to operate.” However, George Bull, senior tax partner at Baker Tilly, notes in this case, at the time of the controversy, a web survey by the company revealed that, while there were very high levels of consumer awareness and concern, “this didn’t translate into any overwhelming intention to change buying practices”.
He adds: “While smaller companies may be able to agree, as part of their ethos, approaches to tax mitigation which fall well short of the maximum which might be achieved, larger/listed companies may feel they have little alternative but to maximise shareholder return by managing tax as rigorously as they would manage any other cost. Dividends and share prices are therefore maintained in part as a consequence of tax mitigation strategies.”
However, Gary Richards, corporate tax partner at Berwin Leighton Paisner, adds that the publicity around the Google, Starbucks and Amazon cases has caused many companies to consider whether their tax arrangements could face adverse scrutiny.
He adds: “Setting tax policy at board level in itself is a good thing, although board level reviews may expose differences between executive and non-executive directors with conflicting perspectives on whether the interests of the company are best served by tax minimisation.
“What is clear is that voluntary payments of ‘tax’ (a sort of ‘honesty box’ approach) is ultimately in no one’s interests, making it impossible for international businesses to plan and impossible for the authorities to enforce.”
Nyree Stewart is deputy features editor at Investment Adviser
