According to Jay Rayner the Seattle-based Starbucks coffee group, which first appeared on the King’s Road, Chelsea, in September 1998, “made real coffee a thing” in the UK. Fourteen years later and having opened 735 UK outlets, it was reported that Starbucks had paid no UK corporation tax in 2011/12 despite making £380m that year. Not surprisingly there was a public outcry: How did Starbucks manage to get away with paying zero UK corporation tax to HMRC? Questions were asked: surely, if Starbucks was getting away with not paying its fair share of corporation tax it was creating unfair competition for British rivals, i.e. Costa Coffee and Cafe Nero, both of which do pay corporation tax. It was also ripping off the UK public purse, because even Starbucks makes use of public services, even though it is not contributing fairly to them through corporation tax.

We made a loss!

According to Reuters, “Starbucks stands out because it told investors one thing and the taxman another,” so while Starbucks claimed it had been making a loss in the UK for fourteen out of the fifteen years it had operated in the UK, their accounts as well as with their message to shareholders seemed to suggest differently. The UK public accounts committee accused the company of using artificial corporate structures to shift profits out of the UK into lower tax jurisdictions, and the public boycott that followed further threatened to damage the brand. Discussions with HMRC took place, until, in 2013, pressure on the company was equal only to the damage being done to the Starbucks brand.

The pressure grew until it was great enough for Starbucks to offer to pay £20m in corporation tax over the next two years even though the company was not legally obliged to do so. In a Donald Trump-like turning around of the facts, the company managed to look altruistic somehow. Thus, in 2015, Starbucks paid as much corporation tax as it had in its first fourteen years trading in the UK, only slightly less than the £8.6m it paid over the fourteen years after its 1998 UK debut, despite generating £3bn worth of sales in that time.

How did Starbucks manage “legally” to owe zero UK corporation tax to HMRC?

Starbucks managed to avoid making any profit in the UK, apparently, by:

Paying high or inflated royalty fees to subsidiaries in lower tax countries to use the Starbucks brand;

Importing its coffee beans through Switzerland, a well-known tax haven, and the Netherlands, where it was revealed Starbucks has a low-tax deal with the Dutch government;

Funding the whole UK operation on debt to other Starbucks subsidiaries, paying interest (which is tax deductible in the UK) at high or inflated rates.

All of these arrangements are designed to move money made in the UK out to subsidiaries in other countries where lower rates of tax apply, and as corporation tax is levied on profits, Starbucks was able to avoid paying UK corporation tax through complex international payments within the company known as “transfer pricing”. Perfectly “legal” but morally questionable, by using this structure Starbucks could show a loss due to a 4.7 per cent premium paid to the Netherlands division – where the coffee beans are roasted, and another 20 per cent premium to Switzerland to buy the coffee beans. Most simply put, as corporation tax in the UK is only paid on profits, Starbucks ensured it made no profits by making large royalty and other payments to offshore companies, including charging itself for using the Starbucks name!

And it isn’t only Starbucks, but Google, Amazon, and Facebook have all generated similar huge revenues and paid laughable amounts of corporation tax between them. However, as they all insist, they are not UK companies, are transparent on tax matters, and abide by the law. As it transpired with Google, however, the company had avoided UK tax by channelling non-US sales via an Irish unit, an arrangement that allowed it to pay taxes at a rate of 3.2 per cent on non-US profits. This

General Anti-Abuse Rule (GAAR)

The government’s anti-abuse rule or GAAR came into force in July 2013. Will this have any affect on Starbucks’ tax arrangements even though the company insists it is not operating any “artificial” or “abusive” tax structures? Under GAAR, Starbucks will have to show the genuine commercial purpose for buying coffee beans through Switzerland (and this is only on paper as no beans pass through there); prove the business purpose for the huge royalty fees for an allegedly unprofitable company as well as high-rate internal loan structures. It will have to prove that the purpose of these arrangements is not purely to gain a tax advantage. I’d say that will be difficult to prove.

Is it likely that Starbucks and other big corporations will pay tax accordingly now?

Starbuck’s tax contribution for 2015 was only slightly less thanthe £8.6m it paid over fourteen years since its 1998 UK debut, despite £3bn worth of sales during that period. The company has also shut down Alki, part of its elaborate network of companies designed to cut taxes at its former European office.

The company appears to be declaring a profit and paying a fair tax rate on it, but still, evidence as to whether the profits on which tax is paid are fairly stated is scant and no one knows, yet, what royalties are being paid to related companies and whether tax havens are being used.

All most people want is for Starbucks and companies like them to pay a fair rate of business tax, but working out a fair tax rate for a complicated business structure that has been artfully entangled with “legal” accounting strategies and geographic complexity, is not as easy as simply calculating a percentage tax rate. So long as Starbucks and other large multinationals are not obliged to declare all profits and show where the profits were made, they can largely declare whatever they feel like declaring.

Starbucks and others might have managed to get away with underpaying corporation tax in the recent past, but it appears the bonanza has been curtailed. Meanwhile, HMRC continues investigating hundreds of small business’s tax affairs where it suspects aggressive tax avoidance schemes or evasion. A Good accountant playing fairly according to UK rules on tax can still save you substantial sums of money on tax, ensure your business structure is legal and sound, and help you attract finance as well as make tax-efficient decisions regards investment in your business.