Starbucks 2007 – profitably taxable for HMRC

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.

The fact that Starbucks was described as profitable is consistent with the position from US GAAP or looking at EBITDA. This has been explained in the FT and also Christie Malry’s blog.

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

SB 2007 dpr

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.

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About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
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4 Responses to Starbucks 2007 – profitably taxable for HMRC

  1. Andrew Jackson says:

    This looks a little odd. They seem to have a £3m CT charge, despite disclaiming CAs well in excess of that amount, and so are ending up with cash tax to pay (unless I’m missing something).

    It’s rare to do that deliberately. All I can think of is:

    – they have other group companies they could be claiming group relief from. If you have no group companies, you might as well claim CAs as you don’t need the future flexibility of deferring them
    – they know they’ll have losses (pre-CAs) in 2008 to carry back
    – at the time they filed the accounts they hadn’t finished their CA claim, so for accountspurposes they used comps that left it out on the grounds that it’d only be a shift from current to deferred tax and no-one cares about that

    Or the catch-all excuse for any odd behaviour in a US-owned company: US Tax Planning Reasons 🙂

    I’m also slightly interested that they have a credit to impairment of owned assets. Presumably they’d impaired some leases in the past but then reversed that – but why do that if you know a bad year’s coming?

  2. Thanks for the reply!

    It is very odd, isn’t it? I can’t think what the benefit in the UK would be – they are maximising any tax liability by the looks of things.

    There is a small UK group, but aside from the holding company, they all appear to be dormant, so there’s minimal opportunity for group relief. Also, when they have claimed group relief, they’ve identified it as such.

    I think they claimed group relief in an earlier year (in the 1990s), but they haven’t shown one in this period.

    I’ve been working through chronologically and 2008 actually shows a tax charge. No losses utilised. However, they unrecognise a deferred tax relating to £20.2m of “tax losses”.

    I’m wondering if they’re streaming losses, so only offsetting brought forward losses against certain parts of the business. This would increase their ultimate tax charge. But it also might explain how they will not claim losses but still carry forward the benefit.

    Either that or the losses relate to non-trade activities…

    With regards to the capital allowances. they do show a prior year adjustment in 2008 which I was trying to see the source of. That could be the capital allowance claim going in once they realised that 2008 wasn’t that bad.

    The brinksmanship explanation does work there, I think. But it also suggests that they are focused on non-avoidance mechanisms for managing their liability.

    I’d appreciate any further thoughts on it you have.

    Cheers!

    • Andrew Jackson says:

      Streaming losses would be odd, unless the derecognition of the DTA is extinguishing them altogether rather than simply derecognising them. Maybe if the smaller trades are loss-making at the moment, and we’ve stopped trying to persuade the auditors that they’re going to be recoverable. Or maybe HMRC were challenging them and we’ve conceded. We’d have to have transferred in some substantial loss-making trades at some point in the past, though.

      Are they capital losses, perhaps? Recognising those for DT has always been interesting.

      What’s the restatement of 2006 all about? Are they adopting IFRS for the UK stats, perhaps? That would give some odd DT movements, and be an excuse to do some deadheading.

      • I was wondering if it’s from acquiring competitors trades. They do have some “independent looking stores”… but it seems high for that, doesn’t it?

        I think capital losses sounds right. They made a significant set of disposals in 2008 by the looks of things and those losses are not mentioned before then. It seems a logical conclusion… (I’d love to see the computations, dammit!)

        So all things considered, despite poor accounting losses their tax profits are looking comparatively healthy…. That’s not what I was expecting from the media narrative.

        Also, they probably won’t have to lose too much in the way of trading losses by “not claiming them”.

        The 2006 restatement is related to adopting FRS 20, according to the accounts.

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