Signing off on Starbucks for the year

It’s a busy time of the year what with Christmas events and the draft legislation for Finance Bill 2013 being published.

Consequently, I’ve not had as much free time to review all of Starbucks accounts which I’ve scraped together from various free sources on the internet.

But, generally, Starbucks accounts paint a very different picture to that given in the national media.

For starters, Starbucks have declared taxable profits to HMRC when they said they were profitable. It’s only the profits under UK GAAP which are misleading.

Also, the level of losses appears to be significantly less than I reckoned at first and had been made out.

Looking at the 2008 accounts, there is a deferred tax asset of £20.2m which is more being recognised which I haven’t identified before. In fact, trading losses appear to have been utilised in the two preceding years and they are declaring trading profits to HMRC.

The losses are probably capital losses arising from a disposal in the year.

This is interesting because it takes the significant amount of losses, which may have been forfeited under Starbucks commitment, off the table to a certain extent.

But the other thing is that Starbucks profits (and the taxable profits I’ve tried to estimate) are reasonable. The company doesn’t make flat losses, there’s a story to their “14 out of 15 years of losses”.

The key events relate to the last decade, which is the period over which the royalties have been paid. The start of this coincides with the closure of the UK roasting plant and transfer of operations to the Netherlands.

Before then, there is little of contention, except for the mark up on coffee beans, I imagine.

The transfer might be worth looking at more closely, but assuming it is something akin to centralising European operations and not just a paper transfer, this triggers the charge to Netherlands.

I half wonder if the term “royalties” is a misnomer, but I need to go back to the PAC minutes for that.

Starbucks expands strongly and they are making taxable profits in the UK in 2006, 2007 and 2008.

The last quarter of 2008 is when the downturn hits. 2009 they take a pummeling but bounce back in 2010, creating taxable profits again.

I haven’t got the 2011 accounts yet and I’m not going to comment because their profitability is volatile.
This means they’ve paid a bit of tax on an overall accounting loss, and reasonable taxable profits in a few years.

I don’t see any signs of avoidance in the accounts, except for the transactions commonly discussed – the royalties and the bean mark up.

Both of these are subject you transfer pricing which aims to impose an arms length prove on the transaction. Starbucks have benchmarked their costs against independent third parties they license to or supply to.

Therefore, these transactions are within the intention of the law and not avoidance, which is where the argument began and ended for most tax professionals.

This has been reviewed by HMRC. The 2009 accounts (drawn up in 2010) state that they are in discussion with HMRC about amendments and that they feel their TP methodologies are reasonable.

I understood that the adjustments were made prior to then, but I need to check that. I think they may have come into effect in 2008.

The thing I come back to is motive though.

There’s no motive for creating losses in the UK, as I explained initially. But that’s not what was happening.

They’ve made smaller losses than I anticipated given their losses brought forward. But they’ve also made more taxable profits.

This is a bit of naivete on my behalf. I assumed that the media and particular commentators had read the accounts. They haven’t.

But the structure seems more efficient to my planning brain now, but the business also seems a lot more profitable (for tax purposes) than it had been made out.

Analysis-wise, this leaves me with a lack of closure at present. But it does give me a resolution.

A New Years resolution, that is, to never rely on information from a newspaper again.

Merry Christmas

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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