SSE : Talking Tax with SSE’s Head of Tax

With so much public spending on coronavirus support packages, do you think it is inevitable that tax rates across the board will have to rise?

It is true that good governments seek to balance budgets over the long-term but that doesn't necessarily have to mean taxes rising across the board. The coronavirus pandemic is unlike any disruption we have encountered as a modern society and governments have taken steps that, one year ago, would have been considered unthinkable.

Protecting people from the worst economic effect of the virus is right, as is the focus to protect health services from being overwhelmed too. This has led to unprecedented spending by governments. While it is a matter for governments and the voters who elect them, there are choices as to how they raise the funds to support public spending. Taxes are primarily levied based on income, wealth and consumption, and governments have some discretion as to how the burden should be spread across those areas, and for different types of taxpayer.

There is also the potential to use the tax system to change behaviours. For example, by taxing social 'bads', for example pollution and carbon, and through tax reliefs to encourage social 'goods' such as investment in people, research and infrastructure.

SSE is a long proponent of making sure carbon emissions have an appropriate 'price' to help support the economic case for low-carbon activity. This 'price' in the UK is a combination of a European market price and a UK carbon tax.

From SSE's business perspective we strongly believe that this carbon tax is very important - not just to support some of the low-carbon infrastructure investments we want to make, but to support climate action across the economy.

Can a business ever truly have a 'constructive' relationship with tax revenue authorities?

Yes, I firmly believe so. Constructive working relationships require trust and respect. While, at SSE, we work closely and constructively with the revenue bodies in the UK and Ireland, that doesn't mean we have to agree with them on every issue. Where that is the case, we will make our case and - on very rare occasions - we might seek arbitration through the courts. If a spirit of mutual respect and trust is standard, then both parties can respect the outcome and we can all move on. The question of what tax allowances were available to us when we built Glendoe Hydro Electric Station is a case in point here.

When SSE and HMRC analysed the expenditure we incurred constructing the asset, and applied tax law to determine what tax allowances were available, we came to different answers. The amount of expenditure involved was significant, and the relevant tax law was not entirely clear, so we needed the courts to opine on the matter.

The fact we have had to rely on the courts to settle what is a genuine tax technical question has in no way damaged our relationship with HMRC, both parties having agreed that it was the appropriate course of action to take in those circumstances.

Our economies have changed beyond recognition since the building blocks of tax systems were established. Are our national tax systems managing to keep up with the nature of business in the 21st century?

This is an important question and something that governments across the world are grappling with.

In the 1950s and 60s, most 'assets' of big corporation were tangible. In other words, there were bricks, mortar, plant and machinery. In our modern 21st century economy, the 'assets' of some of the world's largest companies are 'intangible'. Things like intellectual property, goodwill, brand collateral and software. This shift has not successfully been reflected in the way in which economic value is taxed globally. It is reasonably easy to tax a company like SSE - because you can touch and see the assets that create value. The problem is, and as time goes on, it means the tax burden is weighted disproportionally on tangible assets and insufficiently on intangible assets.

Getting this balance right should be good for everyone: the public will gain trust in the tax system, public services will be supported, and balanced economies should result.

With some companies having larger balance sheets than some nation states, what can be done to help ensure that economic activity is appropriately taxed in the right place and at the right time?

Many businesses operate on a truly global basis, however tax regimes are driven by domestic law. It is only through cooperation and coordination that tax regimes can effectively tax multinational businesses. The OECD - the intergovernmental organisation that seeks to bring about progressive co-operation between economies - recognises that taxing big corporations between countries is important and things like 'country-by-country reporting' by multinational companies is a great start. It means a company's stakeholders and customers can see exactly what economic activity was undertaken in their country and can see the tax activity that results. The OECD is making some progress in establishing standards that countries can adopt. But we shouldn't underestimate the importance of public opinion either. That's where the Fair Tax Mark comes in - the independent 'badge of honor' reassures the public of a company's intentions and their tax policies and practices. The Fair Tax Mark's next important development is to create an international mark - so it's not just UK-listed companies with international activities that can demonstrate their tax credentials.

With so many companies under enormous pressure and strain due to the coronavirus crisis, is there a role for ethics and values in tax systems?

There is always a role for ethics and values in every aspect of the business world - and tax matters are no different. A good starting point is for a business to be clear about its purpose - the reason it exists beyond simply any profit motive. In SSE's case our purpose is to provide people with the energy they need today at the same time as building a better world of energy for tomorrow. We are accountable for doing this - not just to our owners - but to a multitude of stakeholders. The communities and society we provide energy for are a core stakeholder - and when we are successful and make a profit, the link back to that society is to contribute taxes to pay for the public services we all benefit from. It isn't just a set of rules that connects business to the society they serve, it's ethics and values too.

As a tax professional, and if you had a magic wand, what would be the most important reform you would make to business taxes in the UK that would bring about a better outcome for the UK as a whole?

The coronavirus pandemic presents an opportunity to rebase the UK's business tax regime for the longer-term. Sustainable changes can be made, in conjunction with the OECD and other tax jurisdictions, to implement a tax regime that taxes all profits that are genuinely earned in the UK. That regime needs to be flexible enough to recognize what it is that generates those profits, be it physical assets, intangible assets, human capital or customers here. With a tax regime that appropriately taxes UK activity we can then use that regime to incentivize the companies who invest in assets and jobs the UK needs to 'build back better', and disincentivize polluting or unsustainable activities.

Does the UK tax regime have a role to play in encouraging investment in low-carbon infrastructure?

Reaching the UK Government's target of 40GW of offshore wind by 2030 will require significant levels of investment. Tax is a factor in any investment decision, especially for assets that are intended to operate for decades. There are three elements of the tax regime currently applying to offshore wind assets that can have a significant impact on investment decisions, being:

• the rate of tax allowances available on constructing the asset;
• the extent to which tax relief is available on borrowing costs to fund the construction; and
• tax relief available on the costs of safely decommissioning the asset at the end of its life.

These are all areas where more can be done to further incentivise investment in low-carbon infrastructure.