There’s a lot to consider when investing, from dividends to predicted performance and many other things. But, should you also consider a company’s tax affairs when you’re investing?
Although ethical investing is on the rise and people are talking about it much more, tax is still rarely spoken about.
Some people believe paying a fair share of tax is one of the most important things to do ethically, while others suggest a company’s tax affairs are far less important to their commitment to tackle carbon emissions or social inequalities.
This post is designed to give you an overview of what to look out for in company’s tax affairs. It will hopefully help you decided whether you should consider them when investing.
- What do I mean by a company’s tax affairs?
- Why you should consider a company’s tax affairs
- What this means for your portfolio
- Why you might not want to consider tax affairs
What do I mean by a company’s tax affairs?
Taking into account a company’s tax affairs isn’t quite as simple as it might seem and sometimes the information isn’t easy to find.
In the UK companies pay a range of taxes but corporation tax is the main one I will consider for this article. This is because the others – like taxes on PAYE – are generally quite hard to avoid and most will pay a fair share on this.
UK headquartered companies are legally required to publish their financial results each year. Most will mention how much tax they pay in these results because it’s a big expense that should be accounted for!
It can be harder to find information on non-UK headquartered companies’ tax affairs, but you can find out the base rate of tax they will be required to pay wherever they’re registered.
Additionally, large companies often attract media attention, so you might be able to find out by searching online.
Why you should consider a company’s tax affairs
There are many reasons why you should consider a company’s tax affairs.
Consultant Charlie Goodman said you should because tax is a key contribution to society. However, he did warn that it’s more important to encourage people to start investing at first. You don’t want to put off potential investors!
Ethical investing should look at all aspects of unfairness and climate related issues. Therefore, tax is an obvious place to start. Tax pays for vital public services we all benefit from and help protect society’s most vulnerable.
Others suggest if a listed company is paying tax on its profits, then it could be more likely to be making genuine profits rather than using smokescreens and mirrors to inflate its figures. This does make sense on some levels as it’s very hard to pay tax on false profits!
What this means for your portfolio
If you start excluding companies on the basis of their tax affairs, your portfolio might start looking quite a lot different.
Depending on which companies you invest in, you may find your returns dip a bit. Some companies that may not pass the ‘tax affairs test’ are also big earners – think Amazon.
In the long run though, many suggest this short-term dip will pay off.
Impact investor Jonny Hick said you need to consider the impact of potential future anti-tax avoidance measures and/or new tax laws on asset valuation and share price. These new laws – if implemented – could substantially reduce future earnings, meaning you might be better off not having them in your portfolio to begin with.
For those that invest in funds – which is a great way to start investing! – it may be harder to exclude certain companies.
As far as I’m aware there aren’t many funds that actively state they consider companies’ tax affairs. Some ethical investing portfolios might, however. You should be able to access what companies a fund invests in, so could make your decision that way.
Beware, many sustainable portfolios do invest heavily in big tech – which is part of the reason they’re doing so well at the moment! Big tech companies can be some of the worst offenders for tax avoidance, so if you do want to avoid investing in these companies, pay extra attention to these funds.
Why you might not want to consider tax affairs
Some people don’t think you should consider the tax affairs of a company when investing. There’s no right or wrong answer here!
The Income Investor argues that it’s too far down the list of things to consider when investing. They suggested that it’s more important to consider market opportunities, how a company compares with its competitors, cash conversion and quality of management, among other things.
A Money Thing Happened is also of the view that you shouldn’t consider a company’s tax affairs.
Jordan says: “I try to remove time and emotion when picking investments. Too much research would be counter-intuitive.”
Some also argue that there are more important ethical concerns to consider than how much (or how little!) tax a company pays.
For example, a company could have a large philanthropic venture and be very pro-active about climate change. But what if it also doesn’t pay what most would deem a fair share of the tax it owes. How would you weigh up whether that was a sustainable and an ethical investment or not?
Ethical investing is an art not a science. You can look up as many statistics and figures as you like but you probably still won’t know exactly which companies to choose. Large investment firms are still arguing about what counts as an ethical investment.
The most important thing you can do is think about it when making decisions. If you’re happy with your decisions and your investments sit well with you morally than that’s all that count. Hopefully you’re creating a fairer and more sustainable world too!
If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences. Do you consider the tax affairs of companies you invest in? Why or why not? Is it something you might think about doing in the future? What would you recommend others do? Share your thoughts below!
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