Why Starbucks matters to Ashbourne

Starbucks have been in the news recently for all the wrong reasons. It has been uncovered that in recent years they have not paid any Corporation Tax on their profits because… they haven’t made any. The Starbucks case is a really good one to highlight the dilemma over tax avoidance for businesses in the same way Jimmy Carr’s financial affairs highlighted the dilemma for individuals.

Tax avoidance is legal but the bad taste is all about the morality of it. In Jimmy Carr’s case his affairs resulted in him keeping more money in his pockets and handing less to the Inland Revenue. The consequence of his action is that you and I pay more taxes to compensate. In theory he would have more money to spend on goods and services which may plough some VAT back into the coffers and his financial arrangements will have paid for some lawyers and accountants time which may also indirectly benefit the UK economy. Overwhelmingly though the objection I have to his activities is that his selfishness means I have to pay more. Each year I get a bill from the Inland Revenue for my income tax and I pay it – really simple. By definition Jimmy Carr’s actions affect the less well off the most. There is a critical point where the amount of income offsets the fees involved in any tax-efficient arrangement and generally therefore this is the preserve of the wealthier individuals.

And so to the case of Starbucks. The basic facts appear the same – no laws have been broken and the facts are simple – Starbucks didn’t make a profit and so there are no taxes to pay. When you look at the detail of the situation it appears there are some anomalies in the business model which explain why they made no profit:

1. They pay a 6% royalty for the Starbucks brand to another Starbucks company

2. They buy their coffee from another Starbucks company in Switzerland

3. They pay a high rate of interest on money borrowed…from another internal subsidiary

Overall as a business they pay a reasonable rate of tax – 31% but on overseas operations (of which the UK is one) they only pay 13% – oh how we would love 13% of something! The big loser out of this perfectly legal business model is the UK taxpayer. The money is being sucked away from the UK to environments where a lower tax rate applies or where paying tax can have a bigger benefit. International firms of accountants and financial organisations are making huge fees from pitching this type of arrangement. If you were in any doubt look at this advert from PWC – one the worlds largest firm of accountants http://www.pwc.co.uk/tax/issues/tax-disclosures.jhtml/?WT.srch=1&WT.mc_id=Adwords_swiss%20tax&WT.seg_1=swiss%20tax&WT.seg_2=1t1. UK citizens holding Swiss bank accounts will have to declare their interests to HMRC and the UK arm of PWC is pitching to these people to get in touch so that they disclose carefully. The services offered include “a pre-emptive tax risk healthcheck”. Even more worrying is that they are promoting “the most generous UK tax disclosure opportunity ever: the Liechtenstein Disclosure Facility”. Provided you have held an offshore asset on 1st September 2009, and the you are not currently under investigation you need to “create a link with Liechtenstein if you did not previously have one”. In return PWC state:

The key characteristics of the LDF are:

  • there is a guarantee of no prosecution for tax offences
  • tax is only assessed from April 1999 onwards
  • the penalty is fixed at 10% of the tax to 5 April 2009 and 20% thereafter
  • composite rate and single rate options, which can give favourable results, exists for all years except 2009/10
  • there is no ‘name and shaming’
  • there is an efficient disclosure process
  • there is no need to meet HMRC

PWC are not the only people offering this type of “advice” but this is the type of arrangement which companies and individuals use all the time. Underneath it all the schemes are legal but personally I find the instruction to “create a link with Liechtenstein” for the purposes of avoiding “naming and shaming” unpalatable. These so-called “professional” (I don’t think I have had need to use so many inverted commas in any other blog) organisations approach companies with the latest idea they have which, using sets of perfectly legal manoeuvres around the tax legislation produce an outcome of a marginal reduction in tax. Moving money is a business in its own right but to me I have visions of the HMRC representative repeatedly and unsuccessfully playing Find The Lady with a competent card shark. You can never legislate for all the loopholes and hopefully the current uproar will give the whip hand back to the Taxman.

Jimmy Carr admitted a lapse of judgement and set his affairs straight as a result of the disclosures. Starbucks are caught in a much more difficult position. They have told the investors that the UK market is profitable and, in some cases, a role model and yet they have told the revenue that they have made no money. They have compounded their problems with a hugely ill-judged statement from the UK chief executive saying the company is committed to paying their fair share of tax. They then went on to say the company had paid £160m in taxes. Initially they included PAYE in the list of taxes they paid before it was pointed out that this is a tax by their employees not them. They still claim VAT and rates as their “fair share” and say that they buy cakes and snacks from UK suppliers. The issue for me is that their contrived business arrangements mean I have to pay more tax. HMRC have made a statement saying that, effectively, Starbucks have met their requirements on transfer pricing however they have been summoned to explain this to a Select Committee. As it stands there is a hole in the UK Treasury with Starbucks name on it. At the same time there is tax being paid by Starbucks in other countries – certainly in the USA. Effectively they have exported their profit and their tax liability. They still want all the benefits of trading in the UK  – safe streets to operate on, benefits paid to their staff to supplement their income – but they don’t want to pay the bill here.

What Starbucks are doing is a microcosm of the Buy Local argument. National chains are doing exactly the same to Ashbourne as Starbucks are doing to the UK. The money they make does not stay in the Ashbourne area. They create jobs and pay wages but they don’t buy products from local suppliers, use local transportation services, or support Ashbourne community activities.

I am a keen advocate of Try Ashbourne First and I am now a proud member of Try Starbucks Last. I will not be creating links with Liechtenstein.

About justaukcook

/kʊk/ Not a chef, not an epicure, not a foodie. Just one who likes to prepare food – What really happens in the kitchen and on the high street is what I write about. Follow me on Twitter @Justaukcook and on https://www.facebook.com/justaukcook
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