Starbucks, Tax Avoidance and Spin

The subject of tax avoidance has been big news this year, with politicians and journalists making much of attempts by wealthy individuals and corporations to pay less tax than they apparently should.  As the rest of us endure times of national austerity, such behaviour is viewed, rightly or wrongly, as antisocial and greedy.  But is this view the right one, or has legitimate tax planning been turned into something unsavoury because of the way it has been portrayed in the media?

The problem, as ever, is defining what is meant by the term “tax avoidance” and then determining what is acceptable and what is not.  This is always a subjective matter and getting a consensus on the subject is nigh on impossible.  For example, suppose I own some shares in BP that are now worth £21,200 more than I paid for them.  If I sell the whole lot, I will crystallize the gain and I will have some capital gains tax to pay.  As I have an annual exemption of £10,600 which I can set against the gain, I will be paying tax at 28% on the remaining £10,600 resulting in a liability of £2,968.  Fair enough, perhaps, but could I get rid of this liability altogether and is such behaviour acceptable?

Well, the short answer to the first question is yes and I don’t have to be particularly clever to do it.  I could simply gift half of the shares to my wife so when we sell we split the gain equally between us, each using our annual exemption to get rid of the tax bill.  The reason the gift to my wife works is that there is a specific tax exemption for gifts between spouses.  Accordingly, I can save nearly £3,000 of tax at a stroke and all I have done is use a well-known bit of the legislation in the way in which it was presumably intended to be used by Parliament.  Would anyone object to this, or am I being antisocial and greedy?

Whatever your thoughts, it is not really this type of basic tax planning that is raising hackles; rather it is the use by the wealthy and expensively-advised of rules that are not well known and, more often than not, used otherwise than in the way in which Parliament intended.  The problem is that the outrage at media stories is leading the government to introduce “anti-abuse” legislation that is going to make life difficult for everyone else, not just the abusers.  Ministers will tell you that they are acting to make sure that everyone pays their “fair share” (whatever that means), but they have responded to a number of perceived issues with legislation that could have a materially adverse effect on those who are not engaged in anything remotely abusive and that does not help anyone as the economy struggles to recover from the current recession.

The latest high-profile name to come under the spotlight is that of Starbucks, the well-known coffee chain.  This international group has come under attack for paying very little in the way of corporation tax on UK turnover running into hundreds of millions of pounds.  So have they been using sharp practice to reduce their tax exposure in some way?  I don’t have enough information to comment, but from such information as is in the public domain, it seems to me that the answer as to why Starbucks pays so little corporation tax is not particularly complicated.  Some of the UK operation’s supplies are received from other companies in the Starbucks group.  These companies are not resident in the UK and in paying them some of the UK operation’s earnings have been diverted overseas.  Is this wrong?  Probably not.

HM Revenue & Customs have the means to tackle any abuse of this process by using legislation known as the “transfer pricing” rules.  These rules require that transactions between Starbucks’ UK business and its other non-UK businesses are conducted on normal commercial terms and HMRC have the means to remedy the situation and impose penalties if they are not satisfied that this is the case.  In any event, the UK business has to buy those supplies from someone and a simpler explanation might be that a business selling expensive coffee during a recession is not actually making much of a profit at the moment.  That, of course, is not particularly newsworthy.

I would like to see a more objective reporting of tax issues, which have become heavily politicized over the past fifteen years.  We must be able to debate the issues impartially, as well as to keep those issues in perspective.  That multi-million pound turnover generated by Starbuck’s UK operations generates a lot of VAT and all those people that it employs pay a lot of tax and national insurance contributions under PAYE.  Add in stamp duty paid in acquiring outlets as well as local business rates and I suspect that Starbucks are making a tidy contribution to the UK economy, even if they don’t pay much corporation tax.  Surely it’s reasonable to bring this side of the story into the debate, rather than simply leap to the conclusion that something untoward is occurring?

Carl Barwick – Tax Manager

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