The Relation between Tax Avoidance and Voluntary Disclosures of Taxation in United Kingdom

Abstract

Voluntary disclosure theory predicts a negative relation because the information costs could be higher when conducting tax avoidance. Reducing tax related disclosures could alleviate the concern about whether and how the company has tax avoidance. On the other hand, sociopolitical theories suggest a positive relation because firms with higher tax avoidance may want to reduce the social concern or legitimize their tax strategy by voluntarily disclosing certain tax information. This disclosure could further reduce the concerns when confronting the public pressure or criticism of tax avoidance. Therefore, this study examines the relation between tax avoidance and voluntary tax disclosure by conducting a content analysis. Using a sample of listed corporations in United Kingdom during 2010-2014, I find a positive association between corporate tax avoidance and voluntary tax disclosures, consistent with the predictions in socio-political theories. This implies that to alleviate the increase in the political and reputation costs induced by public concerns, companies voluntarily disclose more tax-related information to meet or alter societal expectations. Furthermore, because governments and shareholders have already relied on the tax-related information provided from annual reports or tax returns data, companies could voluntarily increase more disclosures of soft tax information to prevent regulatory scrutiny.