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
The tax vs. turnover is just for the politicians and headlines. The issue would seem to be that Starbucks, whilst following the rules, are in effect using clever accountancy to minimise how much tax they pay. This is the issue, they take the UK taxpayers cash everyday with a smile on their face then squirrel away most of the cash and contribute little back to the economy in tax contributions.
Posted by: paul, 22 Oct 2012 | 11:47
What Cormac doesn't appreciate is that the spirit of the law usually means something quite different to what the words used actually mean. More often than not, it means the exact opposite.
Thus his article should be disregarded as sophistry.
This is complicated for those who are not proper tax experts, like I am myself, to understand. May I suggest he buys my book, State of Courage.
Posted by: Murphy Richards, 22 Oct 2012 | 14:23
Isn't the issue more related to income/expense shifting between countries for dubious reasons, coupled with setting questionable internal (within group) interest rates,potentially inaccurate customer premiums etc etc.
In short, isn't the concern that Starbucks might be producing a false loss in the UK and, without good reason OTHER than avoidance, shifting profits to more friendly tax regimes?
Posted by: Keith, 22 Oct 2012 | 14:30
Starbucks may not pay much Corp tax, but they must have paid many millions in Employers NIC. It all ends up in the same pot.
Posted by: David, 22 Oct 2012 | 15:37
I love the Grauniad too, but these articles (like the Jimmy Carr ones elsewhere) are designed to stir up the masses, not further their understanding of tax law. Unfortunately journalists all too often turn a blind eye to the truth in search of a good headline. Better this than the Daily Fail. Either way, like Chuck D "don't believe the hype".
Posted by: DW, 22 Oct 2012 | 15:42
I think Mr Marum provides a misleading analogy in his critique of the Guardian's article. What everyone knows about petrol retailers is that most of the price is tax and the retailer is almost a tax collector for the government. What we know about coffee is that margins are at the very least, bigger. It is explicit in the article that Starbucks has used legitimate accounting techniques to avoid tax. The point is that the avoidance is aggressive and denies funds to the exchequer.
Sadly, too many people in the profession quote the rules and miss the moral dimension.
If the rules are bad the profession should join in and say so.
Posted by: Phillip Inman, 22 Oct 2012 | 17:21
No comment on the Guardian's entirely misleading pieces on 'corporate tax dodging', then?
The profession is well aware of the failings of the tax collection system, and even were that not the case, deliberate misrepresentation by the mainstream media is as big, if not a bigger, issue.
Posted by: Michael, 23 Oct 2012 | 06:48
To an extent Starbucks is also a tax collector for the government, it pays 20% VAT on every coffee sold and food consumed on the premises. It pays employer's national insurance, as well as tax on behalf of the 1,000s of employees it has.
As a limited company with external shareholders, its directors probably have an obligation to minimise its tax exposure.
Posted by: greg, 23 Oct 2012 | 08:59
I am surprised that the Tesco tax contribution in the UK has not been considered in the same vein as Starbucks - though far larger an organisation.
Posted by: Michael Colin, 23 Oct 2012 | 09:57
Starbucks claimed to pay £millions in VAT when in actual fact it merely collects it on behalf of us caffeine-addicted punters!
Posted by: Rhona Graham, 23 Oct 2012 | 10:20
I hope we are clear on what is the prime difference between tax Avoidance and tax Evasion. I appreciate looking at the moral side of the story and highlighting current corporation tax scenarios. However, should not we PRAGMATICALLY expect a profit seeking business aligning its business model towards making a profit and not aspiring to be a not-for-profit entity ? again bashing a single corporate entity for tax rules ( not written by them) and consequently hurting their public image can't be classified as positive journalism. I hope journalists should show the same kind of flexibility towards criticism as they expect from corporate world. and oh yes, I am no starbucks fan and not related to them in any way...
Posted by: Soumya Banerjee, 23 Oct 2012 | 12:12
It is said that Starbucks UK has made a loss 10 years in a row. How is this possible? If this were the case surely the company would go bust or the owners would give up and cut its losses. The answer is that Starbucks UK pays large amounts of "royalties" to its parent thus eliminating its UK tax liability - convenient.
Posted by: Kevyn, 23 Oct 2012 | 13:29
When we look at the contribution a company makes to the UK economy, it is easy to forget (or omit) just how much PAYE tax is received by HMRC through employment of UK citizens by the companies such as Starbucks. That's even before the secondary benefit to the country through the VAT paid by these employees as they go about their daily lives. I'd be interested to see some expert have a go at calculating this.
Posted by: Rob Wilmot, 23 Oct 2012 | 16:09
I worked at Starbucks' UK head office when they first entered the UK. Back then the average store fit was circa £2.5 million. They operate 731 stores in the UK. These figures, as investments made to the UK economy are notable by their absence in the Guardian's articles.
Posted by: Terence, 23 Oct 2012 | 16:41
Surely it is the customers that pay VAT, and employees who pay PAYE tax and their own NI contributions. Attributing these too Starbucks is disingenuous - they merely collect them, just like very other business in the country.
Posted by: George Porter, 23 Oct 2012 | 20:25
I assume that we may now expedition a retraction from the Guardian over their inept reporting-with equal provenance and publicity given to the original piece?
Posted by: Frustrated, 23 Oct 2012 | 21:12
... if I had posted a loss on my outgoings (as a private individual) for the last TEN years, I'd expect to get a letter from my bank.
The big question is this: Why are shareholders happy to keep their investments in a loss-making concern? Perhaps because they know that the 'losses' are only of the paper variety. The fact that there's a overflowing pool of money in an offshore account (whose spillages swell their personal accounts - also held overseas, natch...) probably explains for the absence of sweat upon their collective brows.
As for Mr Marum's mention of "enhanced allowances for R&D expenditure": where, exactly, is the R&D expenditure in a coffee emporium? Oh, silly me, I forgot about the very necessary trips to far-flung remote tropical islands. Vital to ascertain the quality of the beans, no doubt.
Offshoring tax is theft, pure and simple. Please don't muddy it by telling me that it's legal: who makes the law? Ummm....ahhh.... ohhhh... The Already Very Rich Who Want To Keep Even More Of The Money The Haven't Earned.
Posted by: Oh, if only they would..., 23 Oct 2012 | 22:28
Mr Marum describes himself as a tax "advisor" [sic]. He isn't: he's a tax advisEr.
Posted by: simon_gnr, 24 Oct 2012 | 08:40
I object to large companies avoiding tax, how can it be right that Starbucks pays little CT when Costa, on similar turnover does pay £15 million pa ? As a consumer and taxpayer, I am pleased to know those 2 facts and will turn into Costa instead. I have lived and worked in USA and they have little patience with people or companies tax dodging, I cannot believe that a UK company trading there would get away with this behaviour.
Posted by: cusally, 24 Oct 2012 | 09:38
1.Mr. Marum forgets newspapers need readers. Who would read an article which said "Starbucks resuts for the year were satisfactory. operations were as predicted, we look forward to a similar result next year."? Jounalisn works on the "Dog bites man" syndrome. Exceptions are interesting, imagination is necessary to provide them where the don't exist.
2. Why not include a reconciliation between accounts for reporting purposes and accounting for the purposes of HMRC?
Posted by: Derek Freeman, 24 Oct 2012 | 11:15
We all know the Guardian is not going to spend valuable column inches on educating the masses on the Ins & Outs of the rules of Transfer Pricing without an understanding of which the reader doesn't get a full picture. To be fair though if Starbucks was making actual losses in line with the taxable losses it is reporting we would be seeing a radical restructuring. I think we can safely assume the UK business and taxman is subsidising other parts of the business and what are the odds they are in low tax regimes?
Posted by: Paul, 24 Oct 2012 | 11:37
Keeping it simple. Starbucks has not engaged in tax evasion presumably. They have avoided corporate tax within the accepted legal framework by careful and intelligent tax planning, which is fair play for a business operating in a capitalist system. Tax planning is legal and legitimate from a business perspective. Looked at morally or emotionally, Starbucks not paying taxes might be viewed as "immoral" especially by quoting their turnover. Bottom line for me, as long as you don't break the law, tax avoidance n planning are perfectly acceptable.
Posted by: Neil, 24 Oct 2012 | 12:05
1) Just because something is legal doesn't mean it shouldn't be changed and newspapers are well within their rights to point out that the inconsistencies in the way large corporations are able to use their global leverage to avoid paying tax in the countries in which they exploit their market, while smaller retailers are, in effect, penalized because they don't license their operations from Switzerland. This is anti-competitive.
2) Just because a company creates activities whcih subsequently lead to tax revenue (VAT is a consumer tax, NI and PAYE is an employee tax) does not grant it exemption from their own.
Posted by: James, 25 Oct 2012 | 11:53
I must admit to being tired of hearing the “what about the VAT they pay”….”what about the jobs they provide”…”what about the income tax”…NIC etc.
For a start all these are not paid by them…The VAT as someone said comes from us…the jobs they provide are to make money for THEMSELVES…not out of the goodness of their hearts. Likewise income tax is paid by the person doing the job.
The only one paid by them is employers NIC. This is an expense they incur to make profit for themselves, not as a charitable donation to our financially stricken government.
They sell coffee to make money…if they weren’t, someone else would be selling coffee and paying these contributions.
It is time to stop people trying to make us feel grateful that companies like Starbucks are making money from us, especially if they are not paying their fair share of taxes on their profits
Posted by: Graham, 25 Oct 2012 | 12:16
I find it really annoying when people use the excuse, they may not be paying Corporation Tax but paying millions, or they may not be paying tax on their income, because they are spending money here and creating taxes via the money spent. I would happy just pay NI if I could choose to avoid PAYE, happy to pay wealth tax of £30k, if that means all my other income is untaxed, in return for having residency here. One could also argue these companies avoiding tax are creating jobs for tax advisers and lawyers and therefore be allowed to get away with it and there is nothing wrong. I could argue Costa who do pay their CT if allowed to pay som ethe same level playing field as Starbucks, may be even more successful and therefore would generate more income for the government.
Posted by: SweetCorn, 25 Oct 2012 | 13:41
is it just me, or after reading all of these comments, does anyone else feel the need for a really strong coffee? Now, which one, that's the real dilemma.....
Posted by: Ric, 25 Oct 2012 | 15:36
Starbucks have invested heavily in the UK, created 1000's of jobs (even though mainly low paid) and provided a reasonably good product. So far, so good. There are some very intelligent and creative legal/financial/tax experts who are able to devise processes to minimise tax liabilities. But is there a real will and ability in Parliament and Whitehall to reduce these manipulative opportunities? It's not really surprising that the self-interest of companies such as Harwood Hutton criticise the Guardian for raising an important moral issue and support Starbucks (and other global brands) for only doing what the law allows. Perhaps more of these tax experts should support HMRC in providing a more robust, ethical and legally resilient tax regime.
Posted by: Henry Collins, 25 Oct 2012 | 19:53
I read the counter arguments by Cormac Marum of Harwoodd Hutton on Guardian paper's article on Starbucks.
Mr Marum gives theoretical scenarios why Starbucks may not be engaged in aggressive tax planning where UK real corporate profits are systematically syphoned off to offshore entities where they pay not company tax whatsoever; or to other onshore subsidiaries where they pay much lower tax rates.
If Mr Marum wants to defend Starbucks, he needs to study their 10 year annual reports in depth and work out exactly what extraordinary adjustments, what transfer pricing, what gross and net margins they report vis-a-vis coffee shop typical retail business rather than comparing coffee shops to petrol stations.
Mr Marcum can be accused of the same superficial treatment of the matter as the Guardian reporter. The latter is congratulated by relating profits to turnover as coffee shop net margins are about 50% of turnover of not more.
HMRC senior staff constantly move to high positions in the private sector; but the reverse never happens. Unless and until the reverse trend happens, multinationals and high net worth all British citizens, not just non-doms, will avoid billions of UK tax es each year for years to come. The fiscal deficit five year plan is hard on benefit cheats of a few billion pounds loss each year but not on hundreds of billions lost in tax avoidance.
Posted by: Nagindas Khajuria FCCA, 29 Oct 2012 | 20:42
Lord Clyde gave this famous quote (amongst taxation circles) in the case of Ayrshire Pullman Motor Services v Inland Revenue  14 Tax Case 754, at 763,764:
"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"
Applies equally to organisations as it does to individuals.
It is not the place of government to comment on morality. While the acttivities such as those reportedly carried out by Starbucks may be considered distasteful, if the government wants other behaviours they should produce appropriate legislation to achieve that end.
It is also tiresome to hear "they do not pay a fair amount of tax". The only criteria applicable is do they pay the RIGHT AMOUNT OF TAX as required by the law. If they do not that is evasion and quite rightly should be pursued as appropriate.
Posted by: Brett Wing, 31 Oct 2012 | 22:19
Getting tired of the 'turnover was Xbn where's the CT bill' arguments put forward by newspapers stirring things up.
Also equally tired of people arguing that VAT, income tax and NI are merely 'collected' by companies and are therefore not a tax paid by the company.
Here's how reality works:
I collect £1.20 in sales. 20% of that is VAT I have generated from selling something and pay that to HMRC. Without the sale there is no VAT, so I have generated 20p in tax for HMRC.
I then have to pay my employees.
I pay them £1, for which privilege I have to pay HMRC 13.8p, so the total cost to me is £1.138. Out of this money I then have to pay HMRC the IT and NIC deducted at 20p and 12p, so another 32p goes to HMRC.
If it wasn't for me having to pay the IT and NIC, I could pay my employees 68p instead of £1, so having to deduct IT and NIc is a COST TO ME. So many people fail to see this, even answers to this article.
So out of my £1.20 sale, I need to find 20p to pay the VAT, and then out of my profit after other costs (stock, premises, rent, BUSINESS RATES, local taxes, etc) I then pay 13.8p in employer NIC, and 32p in paye and pay my employees.
After all that we arrive at a net profit before taking into account any capital allowances that may be due.
And then we are asked to pay corporation tax at 24% of what's left before we get to take whatever is left and pay more tax on any salary or dividends we take for working in our own business and employing others.
People who have never run their own business and employees seem to fail to grasp the above simple example of how much taxes a business has to pay before those that take all the risks extract whatever is left for them.
If you do understand the above, then take a look at transfer pricing regulations and the international agreements, EU rules, and piles of other legislation that produce value shifting BY LAW - try changing those if you want turnover in a country to be taxed there, good luck getting a result this century!
Posted by: Ian McTernan, 01 Nov 2012 | 13:11
I find this article as disingenuous as the Guardian article because it does not mention transfer pricing which is dishonest and is how companies, including, I believe, Starbucks.
Yes, companies can put their taxes against losses elsewhere. But they are artificially inflating those costs by 'buying' goods or services from foreign subsidiaries in lower tax regimes owned by them. These subsidiaries massively overcharge meaning that the UK company can post a loss while the company makes the profit in the lower tax regime.
This practice is carried out by Trans National Corporations the world over. Billions have been spirited out of Africa this way.
The Guardian should really be looking at the ways TNCs indulge in transfer mechanisms and which subsidiaries they are using to do this.
Posted by: Marc, 02 Nov 2012 | 14:41
When someone describes themselves as a tax expert as Richard Murphy does then they are either self-deluding or joking. Is his book about a brewery? Specialist surely!!
Posted by: Graham Hirst, 29 Nov 2012 | 10:33
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