Yesterday I posted an excerpt from Starbucks Coffee Company (UK) Ltd’s accounts (Starbucks UK) showing that they were making taxable profits.
I think it’s worth explaining a few points about this.
However, because I’m a tax adviser, I tend to look at the tax position of the company. That’s why my natural instinct to see what is going on at the company is to look at the tax reconciliation and deferred tax notes. This shows you how the company’s profits as declared to HMRC looks.
Whilst you might think this is a bit obscure, anybody reading the 2007 accounts should end up looking at that page. There’s a tax charge in the profit and loss account directing you to go look there for an explanation.
Not only does this not show you that this is a current year tax charge,ie a corporation tax liability, but the company has been using up their trading losses brought forward from earlier years.
As I briefly explained yesterday, this suggests that there were sufficient profits to write off £2,839,029 worth of losses (ie at 30%, so £9,463,430 brought forward losses), but also create a tax liability of £3,109,153 (at 30% this would be £10,363,843 of taxable profits).
Therefore, anybody who has said that Starbucks have told HMRC that they are not profitable is incorrect. Starbucks have told HMRC that they have trading profits of £19,827,273.
Furthermore, looking at 2006, you can see they were utilising losses there too. This means that the company was creating taxable profits.
This analysis is open to variation – chargeable gains and rental income would alter these figures, but there aren’t any significant entries in the accounts which indicate that these are present.
There are a few interesting things that you can infer from the accounts too. Some of these relate to the effects of depreciation and capital allowances. In the tax computation, depreciation exceeds capital allowances by £16m.
In actual fact, the number you get when you work back from the £4,850,724 in the tax note is £16,169,080. Why is this worth noting?
Well, when you look at note 3 of the 2007 accounts, you will see that the depreciation of tangible assets is £17,134,161. Also, the impairment on – owned assets would be disallowed and this is a credit of £965,081.
17,134,161 – 965,081 = 16,169,080
This means that Starbucks UK were claiming no capital allowances in 2007. That’s why this number is exactly the same as the movement in the current tax charge.
That means that they were doing the exact opposite of what they are being accused of: They were maximising the profits in the UK company!
This behaviour is explained by the downturn in 2008. I haven’t examined the 2008 accounts fully, but the results are bad.
Starbucks knew this at the point of filing their corporation tax return so probably opted to retain their deferred tax asset in the form of future capital allowances rather than trade losses.
You’d do this if you were concerned about future profits and maybe the viability of the existing business. Trade losses might be lost in a change in the trade or a change in structure.
Either way, it shows they knew that 2008 was bad.
This wouldn’t constitute “tax avoidance”, by the way. These are choices that are clearly intended by legislation. Mind you, it’s clearly intended that intragroup transactions should be treated on an arms-length basis…
Also, although you can see a significant adjustment for expenses not allowable (£1m), this is equivalent to £3.3m tax adjustment. My question is whether this relates to the royalty adjustment or not. This adjustment jumps significantly in 2008, a fact I’m going to try to consider when I look at those accounts.
The royalties paid in the period were £20.9m, being royalties of 6.3% of turnover. At £3.3m, this disallowance represents 15% of the size of the royalties. This would be a tax reduction to 5.3% of royalties being allowed. And this would mean that there were no other adjustments. For a reduction to allowable royalties at 4.7%, the adjustment on the computation should be about £15m.
This line of the accounts in previous years has been consistently low, but it jumps to over £5m (ie an adjustment of £16.7m in the computation) in future years.
So… Is that the royalty adjustment kicking in? Perhaps. I thought this had been made earlier. But the royalties only began in 2003 following the closure of the UK’s roasting plant on 29 December 2002 and those functions being conducted by the Netherlands company.
This is probably centralisation rather than avoidance. Why would you have your central European operations in the UK? Especially when the coffee actually has to be physically there to roast it.
But if the royalties aren’t being adjusted is the case, then Starbucks were profitable for tax purposes even without HMRC’s adjustment to royalties.
Once I’ve had time to look at the 2008 accounts, I’ll be able to answer some of those questions.
But, in the meantime, on the basis of the accounts and my inference of what was submitted to HMRC, I cannot see any justification for concluding that Starbucks UK were involved in avoidance.
Please feel free to comment to correct any mistakes I’ve made.