Starbucks tax story exposes lack of knowledge

by Cormac Marum, Harwood Hutton

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22 Oct 2012

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I GENERALLY ENJOY reading The Guardian and it has been my newspaper of choice for more than 35 years but, as a tax advisor, I do find it tiresome reading articles in it – and the rest of the press – which get the wrong end of the stick on tax matters so spectacularly.

This week's report that Starbucks has paid just £8.6m in taxes on a reported £3bn in UK sales since 1998 is a classic example of the nonsense that is becoming all too familiar. It really is tax analysis straight from the kindergarten.

Corporation tax, as anyone with a modicum of knowledge of our tax rules knows, is paid on the profits which arise in a tax accounting period; it is not a turnover tax. It is therefore completely meaningless to aggregate 14 years of sales figures and compare that to the aggregate amount of corporation tax paid over the same period.

Just because a company has a high turnover, it does not follow automatically that it has high profits. Why can the paper not grasp this fairly basic point? Has it never spoken to any independent petrol retailers – if any of them are still left and haven't gone out of business despite their comparatively large turnovers? Too much reporting in the recent past blindly swallows this myth that high turnover must mean high tax.

Many fast-growing companies can register tax losses as they seek to invest in their business for growth. There is a range of UK tax allowances which encourage such investments including capital allowances and enhanced allowances for R&D expenditure.

These allowances mean that accounting profits are invariably different from taxable profits, despite the best efforts of adjustments for deferred tax which seek to smooth out such discrepancies. It is not impossible for accounting profits to be converted into a taxable loss and that taxable loss can be set off quite reasonably against profits in other years.

With the plethora of different levels one can talk about profits (operating profits, profit before tax and distributable profits are just a few), it is no surprise that Starbucks executives describe the UK operations as profitable despite reporting tax losses to HMRC. And this remains possible even if, as reported in The Guardian, Starbucks UK have filed accounts at Companies House showing a 10th consecutive annual loss.

The article does have the good grace to concede that "there is no suggestion Starbucks has broken the law". So, if Starbucks have not broken the law, they must have followed the law; in which other field is anyone pilloried in public for following the law? It is outrageous to my mind.

Dear old Michael Meacher MP is quoted in the article. He complains that Starbucks paying so little tax "is utterly scandalous". He believes that "if they didn't think they could get away with it, they wouldn't do it". No, Michael – the position is: if it wasn't according to the law, they wouldn't (and couldn't) do it.

Cormac Marum is head of tax advisory for Harwood Hutton. This article is his personal view and does not necessarily represent those of the firm

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