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18 Oct 2012
THE NEWS THIS WEEK that Starbucks has paid no corporation tax in the UK since 2009 – and just £8.6m since it arrived on these shores in 1998 – is the latest in a long, long line of controversies.
Of course, adding the coffee house's name to the ever-growing list of big corporations allegedly not paying their fair share will do little to quell the widespread ire that many hold.
A substantial part of that is that these companies' situations have not been adequately explained, nor has the government sought to clarify what is due and why.
A case in point in the Starbucks furore is that many reports suggest it has not paid any tax on its turnover. Yet corporation tax is a tax on profits, not turnover, and it posted losses in its accounts, as many fast-growing businesses do. As such, no corporation tax is due.
The biggest issue in the Starbucks story is that its top brass have allegedly been telling investors the company is profitable in Britain while still posting losses with Companies House. That, of course, raises its own questions.
However, the continuing focus on the large numbers and famous names does little to help the true issues or help people at large understand the processes involved. Instead, they are vaguely angry with Starbucks and react by threatening a boycott without understanding how we got to this point.
Education is the crux of the problem, as without it, this situation will persist and more companies – which may or may not be engaging in tax dodging – will be dragged in.
Who undertakes that task, to whom, and by what means is a whole new debate, however.
Calum Fuller is the tax correspondent for Accountancy Age and Financial Director.
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Visitor comments Add your comment
What a patronising article
I think you'll find the public understand only too well what Starbucks has been up to. It certainly isn't that we're 'vaguely angry with Starbucks and react by threatening a boycott without understanding how we got to this point.'
Starbucks Corp. has been paying 'royalties' to itself from Starbucks UK which it owns and controls, for intellectual property it already owns and controls, before calculation of profits and corporation tax at Starbucks UK, as an alternative to dividends, which are of course normally paid after corporation tax has been paid. If Starbucks and other large corporations want to redefine the way owners are paid (i.e. straight out of turnover) then the state will have to adopt a similar tax on turnover too, won't it? I think you'll find the public aren't as stupid as you seem to imply.
Posted by: cantankerous, 18 Oct 2012 | 12:51
Cantankerous!
Wow - I take it cantankerous dislikes coffee shops!
I would wholly disagree that the majority of the public would in any way understand how/when businesses pay corporation tax and certainly the radio reports I heard all seemed to emphasise turnover but not the profits (or lack thereof).
What people do tend to forget is that multinational companies will structure their royalty and management charges to distribute their profits in the most tax efficient way, and the only way for governments to circumvent this would be to make changes to national tax laws to effectively class such redistributions as a form of dividend. Even then, there would be countless court cases as companies try to justify the legitimacy of their international recharges being real costs and not just redistributions through tax planning.
What the majority of the public will also forget/not even consider is the amount of indirect taxes Starbucks will pay in the UK, in the form of VAT (which will be a large amount considering most of their inputs will be exempt/outside the scope of VAT - rent, rates and staff costs), Eer's NI and also business rates (and since they are usually located in high profile, upmarket locations, thier rates will be high).
Don't forget also that their staff will also have PAYE & NI deducted from their pay. And before anyone starts, yes I do realise that many of their staff are part time and maybe don't earn enough to pay tax/NI.
Posted by: Pete Swift, 19 Oct 2012 | 09:06
Education starts with HMRC
HMRC could start by applying the rules that already exist in a more appropriate way - as they do to many other, less highly profiled, less powerful companies.
Royalties of 6% on a cup of coffee seems extraordinarily high for this type of business.
transfer pricing should be considered carefully with their coffee-processing business in the Netherlands & central purchasing via Switzerland.
Finally, thin capitalisation rules exist to stop excessive interest deductions - so use them!
Posted by: Howzat, 19 Oct 2012 | 09:58
Multilateral companies
Before the media has a go at foreign owned corporations they should perhaps make comparisons with tax arrangements of overseas subsidiaries of UK corporations
Posted by: Geoff Wolf, 19 Oct 2012 | 10:30
Help them understand Income Tax first!
Setting aside the comment by cantankerous because I don't want to fact check it, I agree with the general thrust that the public at large don't understand how company taxation works. And the reports no doubt overlook the employer's National Insurance (aka payroll tax) that Starbucks will have paid.
However my particular point is that most people don't understand their own income tax, let alone corporate taxation. So let's start there shall we? Personally I blame the schools, as I think my arithmetic lessons used simple tax problems as the basis for exercises. I dread to think what they do/don't do nowadays.
Posted by: Duncan, 19 Oct 2012 | 11:00
Spot on Cantankerous
Although I haven't seen Starbucks' accounts, it appears that royalty payments and group management costs charged to the UK subsidiary are used to soak up the UK profits so that corporate tax is paid in lower tax countries (USA, Switzerland, etc.). This is common practice in multi-nationals. The question should be: Are the auditors and HMRC sufficiently rigorous in checking the validity of these transactions?
Posted by: Skeptic, 19 Oct 2012 | 11:34
Beware self-styled experts
A large part of the problem lies with a handful of celebrity "experts" who, even though they have only casual knowledge of the workings of tax in practice, claim they can identify tax avoidance better than HMRC can. Despite their evidence being scanty and often outright wrong, they're able to generate a lot of publicity for themselves. This is grossly irresponsible as it undermines HMRC, destroys confidence in the tax system and misleads the public. Unfortunately, the truth doesn't get half the publicity that these lies and distortions do.
Posted by: Christie Malry , 19 Oct 2012 | 13:00
Specifics dubious but principle is sound
The original wire article I read ( http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUSBRE89E0EX20121015 ) was written by someone fairly well informed and explained matters, however it lacked hard data so it was all smoke. Group bonds was the only area it had good data but even there you're left to wonder whether or not the risk profile of Starbucks UK is higher than KFC UK.
Most of the derivative newspapers articles however have merely blown smoke and accusations without any real attempt to explain anything that might enable the reader to make their own informed opinion. Sadly much of the media have no interest in informing and instead merely seek to sell papers with pitchforks.
Mr Swift, while I understand your point and sympathise to a degree, I do not think you fully appreciate what the general public are annoyed about. They do not care whether it is the company or the tax rules which are technically at fault. They do not care if companies are merely structuring their affairs in a sensibly tax-efficient manner based on the rules laid out to them.
However ignorant the public may be on the process, the specifics and who is "at fault", their fundamental point is undeniably sound. Once you look through into the economic reality, companies are generating profits in UK and not paying the tax in UK.
In this case, the ultimate test is whether Starbucks UK would accept the position if it was an arms-length franchisee. Would it accept that level of royalty? Is the price paid for the beans similar to market prices? Would it obtain cheaper finance if sourced independently?
That the UK company consistently posts losses implies that on balance the above tests do not pass.
Whether the blame lies with Starbucks, HMRC, the government or internationally, one way or the other something is not right. Perhaps the fingers are not pointing in quite the right direction, but the public is quite right not to accept it.
Posted by: Dave, 19 Oct 2012 | 19:04
Management fees.
Can I deduct my wifes management fees (she doesn't have ny other employment) from my earned taxable income?
I believe that any member of our UK Club should pay their proper dues and it should not be beyond our wit to ensure our systems ensure they do. We are beset by clever Alecs.
Posted by: G R Smyth, 20 Oct 2012 | 13:33
The wrong headlline
As the author of this article states, the biggest issue in this story is that Starbuck's top brass have allegedly been telling investors the company is profitable in Britain while still posting losses. So why then point out that Joe Public isn't au fait with accountancy basics? That might be true, but it shouldn't distract from the fact that there is a lot that smells about the current tax arrangements of many large multinational companies. It seems that many accountants hold their nose while accepting lucrative tax instructions from these companies. Joe Public might not be an accountancy expert but she can smell a rat.
Posted by: D Walsh, 22 Oct 2012 | 15:15
Indefensible
The problem with this article and the other on this website by Cormac Marum is that it is a bit like asking a hangman to comment on the morality of Capital Punishment, they are both intrinsically involved in a culture which seeks to exploit tax loopholes, and they are well aware that large corporations actively do it…I know that and so do they…its only when Corporate Greed gets to this level that it gets exposed…basically when they start taking the mickey
This licensing issue is clearly a complete nonsense, how can you licence yourselves…the profit generated from Starbucks UK goes to Starbucks group, this is clearly a tax loophole which companies are exploiting. There has to be put in place methods to stop this. I do not profess to know the answer, but maybe along the lines of banning licence fees being allowable expense from a subsidiary that is greater than or equal to 50% held by its parent company.
Posted by: Graham, 25 Oct 2012 | 13:31