... 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.

"They use perfectly legal but ridiculous tricks to avoid paying any tax, like making up whatever figure they wish for loans and interest between subsidiaries and charging themselves whatever figure they want to invent for use of the logo".

Nope, they can't do this. They have to use the arm's length rate (i.e. the going rate in the market) for both loans and brand. It has to be supported by a detailed economic analysis, including third party comparitors, and agreed with HMRC.

"I saw the end of a news item the other week, saying as soon as the Inland Revenue bring out new rules certain companies get their tax experts working on them to find loopholes."

That's certainly true of some companies, yes. And sometimes tax experts will spot a loophole and then go out to find clients who might be interested in exploiting it. In my personal experience, it's becoming less and less common but it does definitely still happen.

"You said that you consider what Starbucks are doing to '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'. I know it is probably far to complex to explain in detail and is to do with arm's length transactions etc, but could you offer a brief explanation as to why this is UK tax policy."

The transfer pricing legislation is anti-abuse legislation. Before it was introduced, companies could, and did, price their transactions at any old level they liked. So if they market rate for roasted coffee beans was £10 per kilo, then the UK company could pay £100 per kilo and thereby reduce its taxable profits. (Obviously it would only pay the inflated price to another group company - no point in putting money into someone else's pocket).

Then the transfer pricing legislation was introduced. It said that the UK comapny had to pay £10 per kilo if it bought its coffee beans from another group company. No more. (Strictly, the UK company can still pay what it likes, but for tax purposes it must prepare its computations as if it had paid £10.) Actually, if the UK company pays less than £10 per kilo and thus inflating its profits then the transfer pricing legislation doesn't kick in to reduce the taxable profits - what a surprise!

So - the letter of the law say pay arm's length prices. The spirit of the law says pay a fair price for the goods/services you receive. Parliament anticipated that if goods/services were sourced from group companies based outside the UK then there would be cashflows out of the UK to those other jurisdictions. It even envisaged that some companies might put valuable functions overseas, and accepted that if they did so then that was OK provided that the UK company paid the going rate for them.

PedallingSquares

I tell them my name is Katy I don't say 44 though as that would be a bit odd don't you think?

TimothyTumblespring, I am one of the f*wits MaryZed referred to, but I am sort to hear your staff are being abused. I don't condone that. Hope you are not taking MaryZed's doom mongering about job losses too seriously. No one does proper boycotts any more, it is all about headlines and political intervention these days.

CinbarRed, thanks for your explanations, they've been very interesting and informative. However, if anyone is interested in understanding why anyone could appreciate that Starbucks have done nothing illegal, yet still think their arrangements should be highlighted and held up to public scrutiny, check out Robert Shrimsley in Yesterday's FT.

I don't care that Starbucks are paying more tax in the US as a result of these arrangements, I think that tax should be paid in the most appropriate jurisdiction. And we should all be mad that we allow Switzerland and especially Ireland to condone companies using their tax regimes to create contrived and artificial tax minimising structures. This is why the subject needs to be kept on the agenda, and I am afraid that a bit of anger about a household name does that quite well (ironic that the brand is a liability as well as an asset).

It sucks if you happen to work for today's whipping boys, but I am sure Starbucks can take it.

Thanks, that is interesting CinnabarRed

So the legislation that has led to Starbucks paying little or no tax is not likely to be changed any time soon to stop this happening? That Starbucks pay little or no tax in the UK is acceptable to HMRC as part of a bigger, more complex picture

ivykaty44 Maybe numbers instead of names is the way to go

I always feel a bit of a twat walking around with my name written on the side of my cup.

Are Starbucks generating "hundreds of billions of pounds of profit"?

I just went to Companies House and pulled off some information about the Starubucks UK companies.

SALES AND GROSS MARGIN

In the 52 weeks to 2 October 2011 (most recent figures available) the main UK trading company had sales of £398m. It had cost of sales (which I would expect to represent largely the ingredients to brew the coffee and possibly salaries of the baristas to do the brewing) of £319m, leaving a gross profit of £79m (just a shade under 20%).

But is that reasonable? I did a quick sensecheck by comparing the gross margins of Costa and Pret.

Pret made sales of £319m and incurred cost of sales of £109m, giving it a much healthier gross margin of £210m (65%).

Costa made sales of £377m and incurred cost of sales of £101m - it's gross margin was therefore £276m (73%).

I'd like to understand more about why Starbucks' gross margins are so low compared to its competitors. It may, in fact, be paying over the odds for its coffee, although see below for some observations on operating costs and employees.

OPERATING EXPENSES

Starbucks had operating expenses of £107m, giving it an overall operating loss of £28m.

Pret's were £173m - so much higher than Starbucks, which makes me wonder if it puts some costs in operating expenses that Starbucks puts in cost of sales? - so it had an operating profit of £35m (11% of sales).

Costa's were £227m, again much higher than Starbucks. It's operating profit was £49m (13% of sales).

INTEREST AND TAX

Starbucks interest expense was £2.7m. It had a loss before tax of £33m and no tax charge in its accounts.

Pret didn't have much interest so its profit before tax was still £35m. It had a tax charge of only £1.4m, which is lower than I'd expect off a profit of £35m (4% compared to a corporation tax rate of c24%).

Costa also had negligible interest expenses, so its profit before tax was £49m. Its tax charge was £15m (30%, which if anything looks a bit high).

OVERALL POSITION FOR THE YEAR

Starbucks' loss for the year was £33m. Pret's profit for the year was £33m. Costa's profit for the year was £34m.

RENT AND EMPLOYEES

Starbucks and Costa paid very similar amounts for renting their stores - £59m and £54m respectively. Pret paid much less - £32m. It seems like someone in Pret has done an excellent job of negotiating its property leases!

Starbucks has way more employees than the other two. It has 8,763 compared to Pret and Costa was 5,600 and 5,629. Unsurprisingly, Starbucks' wage bill was much higher - £113m compared to £79m at Pret and £83m at Costa.

That suggests that Starbucks isn't being run well. It's paying more than Pret for rent and isn't as lean as either of the others for staff.

MY CONCLUSIONS

If I were HMRC I would take another look at the price Starbucks is paying for its roasted beans. Other than that, it seems that the rest of the loss is due to poor management (paying too much for rent, operating with too many staff).

I'd also take a look at why Pret's tax charge is so low.

That should say my Starbucks name

I'm pretty sure that SB must be putting direct labour costs into cost of goods on that basis, cinnabar.

I don't like the fact that Starbuck makes a operating loss (and has done for a while).

Could be different property types on the rent - not sure how much sit in vs takeaway business each has but my impression of costa at least is it aspires to be a sit in place more and more. Could also be that pret picks slightly more secondary sites.

Costa seem to have been quite aggressively setting up franchise type operations in the past few years (garages, banks, service stations, pubs).

Costa acquired the business that supplied coffee via machines in garages previously - was it Coffee Nation? Anyway, it had a silver and purple logo.

That would improve their staff to revenue ratio, as would the sales via other outlets eg Tesco and in banks where security etc is shared. Depends if whit bread recognise those sales within costa or in another operating company.

whitebread have costa in their own hotels, so this would bring their rents down

True. Starbucks have a retail range plus supply to some offices. Don't know where in the company that all sits.

I like this report:
starbucks because it spells it out, with lots of facts and figures thatt we can all understand.

HRMC have already investigated Starbucks and for whatever reason, took it no further. Thats just not good, no matter how you look at it, is it?

CinnabarRed Great breakdown - SB has much lower margins compared to Costa, especially when you consider Costa has 1300 branches compared to SB's 600.

The reason for the rent difference is that Starbucks has many more branches in expensive areas. I know in London Starbucks is operating in high cost areas that Nero, Costa and Pret don't operate in and in areas such as Oxford Road Starbucks has a much bigger space compared to the other coffee places.

The higher staff costs are in part because Starbucks treat part time staff the same as full time and give them the same benefits. Other retailers don't do this. When my friend worked for them she was very proud to tell us that her manager had arranged for children from the local school for the disabled to get work experience. Those doing work experience were given proper training and paid the same as the other barista's coming in with no experience. We all thought it was great that they were paying the going rate and giving experience to a group that is underrepresented in the workforce.

Back in the day - the rich man in his castle and the poor man at his gate days - the lord of the manor had certain obligations towards his tenants. He was supposed to school them, look after them when they were sick, house them, etc, in return for their labour, their rents and loyalty.

Now, since the new lords of the manor are called Tesco and Sainsbury and Starbucks, maybe we need a new social contract. We tolerate them in our midst and they take on some sort of local social obligation and put something back into our communities. If the govt won't make them pay tax, then they should help out in other ways, by (as I have said before) building (but not interfering in) schools or community centres, or at least sponsoring local football teams.

It's not fair, and it's not democratic, but it's better than nothing.

I'm fairly sure HMRC will have investigated a large number of multinationals simply because there are so many ways to structure and price things that it is necessary to clarify.

Solo, from want2be's post, starbucks are giving something back.

Yes. It was what Want2 said that made me think of what more they could do.

But really, it's the tax law that needs to be changed, imo.

'... transcripts of investor and analyst calls over 12 years show Starbucks officials regularly talked about the UK business as "profitable", said they were very pleased with it, or even cited it as an example to follow for operations back home in the United States.'

From Oblomov's Reuter's link - I think they broke the story originally.

Solo, I take your point, but one of the problems with that approach is that it allows the tax avoider to decide what they will spend their money on and how much. And to bask in the reflected glory of being so charitable and all. Most people a. don't get to choose how much tax to pay and b. don't get to decide how much of that money goes on a new hip for Mrs Jones at no. 53 or replacing Trident or paying police officers. And quite right too. Allowing the wealthy - or any individual or small group - to pick and choose is no way to run a country. Especially not a company, when the directors are actually playing with other people's money (the shareholders').

Agreed, Edam. But how else to prise their money from their grubby little mitts? The government won't do it, and it doesn't look as if these companies can be shamed into paying their fair share. I was thinking they might at least be incentivised by portraying themselves as local heroes. But I would always be uneasy anyway at the thought that they might get even more power over us in that way.

It is a shame that a firm that is apparently regarded as a 'good' employer that treats its staff fairly can behave in this way. (According to posts on this thread.)

Solo, I know, I think HMRC and the government need to get a lot tougher. If you want to do business in the UK, benefiting from the rule of law, paved roads and an educated workforce and so on, you have to contribute your fair share.

The old boss of HMRC clung on for months after doing his dodgy deal with Vodafone, btw, letting them off billions of pounds of tax they had avoided. Let's hope his replacement doesn't spend quite so much time being wined and dined by companies who are trying to do deals to avoid UK taxes.)

What taxes? They are not liable. All I can hear is the stamp of a tiny foot saying "it's not fair`'.

Edam The irony of your post is that you say they should contribute their fair share as they benefit from the rule of law, yet Starbucks follows the UK rule of law and according to UK law they have paid their fair share of taxes.

You are right that HMRC need to be toughter with companies such as Vodafone, RBS, Arcadia, Barclays, Virgin Group and others cited in this thread. The people who enable HMRC to be tougher are our MP's. I urge you to direct your wrath towards them and not companies such as Starbucks who are following the rule of law in the UK.