... ask MNers to boycott Starbucks?

[legoballoon]

Personally, I won't be spending any money there again.

When I read the 'we pay our fair share of tax' statement, I almost choked on my (home made) hot chocolate. It's one law for the rich, another for us now is it?!

I think we should support small, UK-based independent coffee shops. Let's support businesses that generate wealth that is shared by local people.

Right now, I am boycotting mothercare

Take that mothercare. HEAR ME ROAR

"they post no profit", therefore no tax to pay.
Err yes. me thinks, here lies ze problem.

Arms length transactions ?
Managment charge here, management charge there.
ohh look. No profit. Huuuurrrrah.
They don't need any magic tips from Dynamo, re making things 'disappear', Do they ?

But the management charges result in revenue for another starbucks entity - in this case it seems that much of the profit is recognised in the US which actually seems to have a higher corporate tax rate.

Do people think that they are avoiding tax worldwide or just that the distribution of tax is wrong?

Re the interest rate: LIBOR plus 4% isn't the most generous or the most onerous of rates. If starbucks uk was to try and raise a corporate bond as a standalone entity, it might have to pay a higher rate than this. If it raised its own bond but with the parent company guaranteeing it then the bond rate would be lower but it would be reasonable for there to be a fee for the guarantee.

I assume that wholly uncommercial interest rates would be subject to scrutiny also but Cinnabar would know more than me on that point.

Sorry if people find my posts patronising. I don't mean them that way. So obviously just ignore if they're not your cup of tea.

The tax gap is very topical at present because HMRC released their tax gap estimate for 2011 yesterday. It's down from £35bn to £32bn.

But before I break down the figures, perhaps I could share an analogy with you. It might help to explain the difference between different types of taxpayer behaviours.

There is only one hard-and-fast rule when debating the morality of taxes. That's the divide between avoidance and evasion. Evasion is both illegal and, by common consensus, unethical. Avioidance isn't illegal, and may or may not be immoral depending on the avoidance concerned and your personal viewpoint.

Compare paying your taxes to being in a marriage.

At one end of the avoidance spectrum is planning that falls squarely within the spirit as well as the letter of the law when it was enacted by parliament, and was anticipated by parliament when the legislation was drafted. Things like investing in a tax-free ISA. That's the equivalent to having a friend of the opposite sex. Absolutely nothing wrong and only the most paranoid would view it as unethical.

Then there's planning that falls squarely within the spirit as well as the letter of the law, and was anticipated by parliament, but which has given the taxpayer a lower tax bill than you might expect. That's where Starbucks are. I suppose the closest relationship analogy would be where you have a friend of the opposite sex but spend more time with him/her than your spouse would like. Not wrong, exactly, but not ideal. Most people would say not immoral, I think. In my view, Starbucks are at the one-night-per-month-for-a-shared-hobby level of egregiousness, not out-on-the-piss-three-times-a-week-with-flirty-texts-in-between level.

Then there's planning that falls outside the spirit of the law and was not anticipated by parliament. That's Greene King. It's the relationship equivalent to having an affair. Not illegal, immortal for the vast majority of people. (SABMiller might be more like having an emotional affair, which many people see as less awful than a physical affair.)

Then there's evasion. Illegal. The equivalent to committing bigamy.

Patronising? I don't.
It's been like waiting for the next episode of ........ Boadwalk Empire/Downton/whatever. Anticipation has been painful

Great analogies!

I don't find you patronising. I'm finding this thread really interesting.

It veers from knowledgeable people trying to actually explain what is going on to fuckwits who say "the DM says Starbucks are immoral therefore I'm boycotting them even though I never go there anyway".

It's society in all its variety condensed into a single thread

FASCINATING!

Interest and management charges are also subject to the transfer pricing laws, yes.

For interest, the test is what would bank be prepared to lend the UK company (or subgroup if it has subsdiaries) and on what terms? It's a reasonably objective test because HMRC has access to credit-rating software and so can show exactly what a bank would lend.

For management charges the test is what would a third party charge for the same service? It's a more subjective test, because there aren't all that many management companies providing equivalent services to which the management charges can be compared. The way I look at it is this: if UK company X in the UK didn't pay group company Y for HR services (say) then what costs would it have to incur itself to hire a good, qualified HR director? The same is true for finance, or marketing, etc. Very often the answer is that hiring an HR director would cost more. You might argue that company X doesn't need an HR director of that calibre, or full time, or whatever, and there might be some truth to that, but I find it a reasonable starting point.

I understood right from the start that there was nothign illegal. I know the difference between tax avoidance and tax evasion.
I also know that, in all areas of 'accounting', the incredible number of 'shades of grey', would make Christian weep!

Thanks cinnabar.

I too love this thread. I am trying hard to understand it all as I am thick as mince about some things. But really interesting to my pea sized brain.

Thanks Cinnebar et al.

Thanks Cinnabar. I do love your explanations - they're always very clear.

I have a vague-y idea of some taxes, from doing the Legal Practice Certificate, but not nearly enough. I do find them fascinating.

But oblomov the same is true of any moderately complicated system.

I'm downloading the latest Tax Gap report now!

One point to make before we get into the nitty-gritty detail. This is HMRC's best guess of the difference between the amount of tax it thinks should be paid and the amount of tax that actually is paid. By definition it's an estimate rather than a hard fact.

Personally, I think HMRC are best placed to make the best possible guess.

Some campaigners, most notably Richard Murphy, claim that the tax gap is much larger. He often quotes a figure of £150bn per annum. I don't think that the £150bn figure can possibly be right, and these are the reasons why.

1. Total tax collections per annum are around £450bn. If the £150bn figure were correct then it would mean that £1 in every £4 of tax due was being avoided or evaded. It would make the UK less compliant than countries likes Mexico. I simply don't believe that. The HMRC estimate means that £1 in every £12 goes awol, which seems more likely.

1. HMRC are doing a brilliant job at cracking down on both evasion and avoidance. Tax advisers are now legally obliged to inform HMRC of new tax avoidance schemes within 1 week of making them available to clients, so HMRC can ask parliament to close the loopholes before taxpayers can even implement the planning. The General Anti-Abuse Rule will be enacted from April 2013. International fiscs are working together to ensure cross-border avoidance and evasion are identified and closed down. Jurisdictions are signing agreements between themselves to allow them to exchange information about tax payers they think are being bad. It's never been harder to avoid or evade taxes.

1. My personal experience tells me (anecdotally - so not evidence, I know) that many taxpayers who may well have implemented racy planning ideas 10 years ago, now have no appetite to do so. This is particularly true of corporates and the upper middle-classes. Less true for the very wealthy.

1. Evasion is almost exclusively carried out by individuals, sole traders and small companies. There just isn't enough business activity by these relatively small scale enterprises to account for much more than around £15bn of tax evaded. And even if the mega-wealthy refused to declare a penny of income that should by rights be taxed here, there aren't enough of them to add up to much more than £5bn.

If a company did decide that it's underpaying (rather than deliberately evading), is there anything they can do? Could they write a cheque to HMRC and be all "sorry guys, we feel obligated to pay more". What would happen?

One of the strenghts of UK accounting is that it's drafted to be flexible. There are published standards to help people understand how to account for very common or very complicated transactions. But there's an over-ride that says that, above all, UK accounts have to be 'true and fair'.

I've come across situations, admittedly rare, where companies have had to depart from the standards because their circumstances were so strange that applying the standards strictly would give a mis-leading result. In each case the company made a full disclosure in its accounts, pointing out the departure and explaining why. In each case HMRC, rightly, investigated the accounting treatment in forensic detail to make sure they understood how the tax legislation should apply.

In contrast, the US accounting standards are much more prescriptive. As a result companies can find ways to meet the exact letter of the standards even if the end result is misleading to investors, lenders, customers, suppliers and employees.

(Remember Enron? It found a way to hide its debt so it didn't have to be shown as a liability on its books. It all fell apart when it suffered a poor year of trading, which a well governed company should have been able to take on the chin, but which caused it to breach one teeny-tiny covenant in its debt structure. It suddenly had to put $10's of billions of liabilities on its books which investors hadn't known about. The really sad thing is that at that point in time it was still solvent and employed thousands of people doing real jobs who had no idea about the debt structuring. But investors lost faith, pulled out their money, customers didn't trust it any more, and it went bust.)

Absy - if a company felt that its tax planning had gone too far then it could unwind its schemes and disclose what it had done to HMRC so that they could ask parliament to close the relevant loopholes. But HMRC would have no facility to cash that cheque (assuming that the planning did actually work from a technical perspective - i.e. was within the letter of the law)

Here's a link to the HMRC tax gap report:

www.hmrc.gov.uk/stats/mtg-2012.pdf

Cinnabar, you're very good at this. I'm only a lowly independent accountant, I bow down to your comprehensive knowledge.

Out of interest, do you think this thread would count towards the 'reading' part of my CPD?

Thank you cinnabarred for your very clear and helpful explanations! I shall tootle off to my local Starbucks with a clear conscience for my favourite mocha (agree with previous poster who says it's got crack in it ) besides which the staff are lovely and the baby changing facilities are the best in town.

That would be me brandnew