On Starbucks and profits and tax

Starbucks UK tax bill comes under scrutiny
Starbucks, which has $40bn (£24.9bn) market valuation, paid nothing in UK corporation tax last year, despite making sales of £398m.

My word, how can that be?

Starbucks’ UK annual results for the year ending October 2, 2011, show the company made a £32.9m loss, which is why it is not liable for tax.

Simple enough. Don\’t make a profit, don\’t pay a profit related tax.

HMRC said that companies like Starbucks were constantly “discussed” but that just because there was a high turnover it did not mean the company was liable for Tax in the UK.

Quite.

23 thoughts on “On Starbucks and profits and tax”

  1. Starbucks reports the same UK turnover as Costa, almost the same cost-of-sales as Costa, but 3x the admin costs of Costa. Most of said costs being paid to affiliate companies overseas.

    Starbucks also claims to have never made a profit in the UK according to Companies House accounts, but claims to be using its success in the UK to fund its roll-out elsewhere in the world according to its annual shareholder reports.

    There are two possible explanations for this.

    One is that Starbucks UK is managed by raving incompetents – and even with a great deal of valuable management support provided at a market price by their colleagues overseas, they’re only 1/3 as efficient at running the business as Costa. Meanwhile, the group management in the US are also completely inept and hence have failed to notice that the large cashflows from the UK are not actually generating an economic profit at all.

    The other is that the UK business is making about as much money as Costa, but the entire profit is being channeled out of the company and into affiliates in low-tax jurisdictions which overcharge for largely imaginary services. The management in the US are fully competent and aware of the situation, are aware that the UK business is indeed highly profitable on an enterprise basis, and have indeed used the money generated to invest in other businesses overseas tax-free.

    From what I’ve heard about Howard Schulz, neither he nor his management team are idiots who’d let the first situation last long, let alone for a decade. But maybe he’s just overrated.

  2. “Starbucks also claims to have never made a profit in the UK according to Companies House accounts, but claims to be using its success in the UK to fund its roll-out elsewhere in the world according to its annual shareholder reports.”

    Cash flow is used to fund expansion. Cash flow is not equal to profits.

  3. People really think tax should be paid on gross sales rather than profit! FFS! I expect they will have contributed qute a lot to the Treasury in employee related taxes, business rates etc – and they keep a lot of low skilled people off the streets and off welfare – they are doing a good job

    Hate the coffee though

  4. Gosh, really? Thanks for sharing.

    So what exactly are you anticipating will account for the required major differences between cashflow and profit here, in a business that sells for cash, pays its main costs (ie staff and suppliers) within weeks, and has little capital equipment (hence little depreciation)?

    (the answer you’re looking for is “oh, right, he didn’t bother mentioning the difference in this context because it’s completely irrelevant”).

  5. emil – exactly; cash spent devloping the business is allowable against tax. A mate of mine used to work for Starbucks doing store assessments and he told me that he decided to quit when he worked out how many coffees they would have to sell every minute just to cover the rent on the shop he was sitting in. I’m not remotely surprised that it makes little to no taxable profit, and the outrage expressed this morning seems to rely on either ignorance of basic accountancy or wilful stupidity for the purpose of stirring up resentment.

    john b – one key difference between Costa and Starbucks is that Costa is UK-owned (by Whitbread, themselves no idiots and no slouches when it comes to managing their tax bill) and the intellectual property resides in the UK, whereas Starbucks is the UK subsidiary of US-domiciled corporation. I would not be remotely surprised if an examination of Whitbread at a corporate level revealed a similar level of tax management

  6. Stabledoor: for a coffee shop chain, unlike (say) a mobile phone company, turnover is clearly the best starting point for working out how much tax should be paid.

    The business model and expected returns are clearly understood (hence coffee outlets are highly saleable as franchise properties), and as above there’s negligible difference between cashflow and profit.

    The Australian tax authorities, and I imagine tax authorities elsewhere, maintain benchmark profitability ratios specifically for coffee shops, and investigate those whose reported profit margins are way out of line. None of this is at all hard.

    For Vodafone, or for a bank, financial accounting is extremely difficult and the UKUncut lot are grossly oversimplifying and overplaying their case. There’s vast historic plant investment and goodwill to be depreciated/impaired, and investments are made which won’t pay off for decades.

    But this is really just a bunch of coffee shops we’re talking about here.

  7. FA:
    1) Rent is deducted before gross profit. Starbucks pays shedloads of rent (about gbp150m, I’d guess from the Telegraph piece), but still makes gross profit of gbp78m.

    2) Indeed, I’m sure that it’s the case that a large proportion of Starbucks UK’s much-higher-than-Costa overheads reflect IP fees paid overseas. Which was rather my point. The money spent in establishing the brand in the UK during startup will have been marked as an operating loss attributable the UK company; now that this investment is paying off, the value created has effectively been skimmed by the overseas IP-holding company.

    3) The UK ltd co accounts are at the Companies House website, you need to pay a couple of quid. The Costa ones are broken out in the Whitbread annual report, although a bit under 10% of turnover is overseas so not completely comparable.

  8. Stabledoor – ‘I expect they will have contributed qute a lot to the Treasury in employee related taxes, business rates etc – and they keep a lot of low skilled people off the streets and off welfare – they are doing a good job’

    +1

    I couldn’t care less how much tax they pay on their profits. I’d be happy if the size of the UK government was cut in half, frankly.

    Starbucks employs 9,000 people in the UK. A hundred more companies like Starbucks is nearly a million people employed in providing a service that people actually want, rather than something the bureaucrats, politicians, John B and UK Uncut have decided we want.

  9. John B – what happens to all of the GBP that gets sent abroad? Other than, inevitably, it gets reinvested in the UK somehow?

  10. Kelly: would you rather 1) there is a democratic decision to abolish corporation tax (I wouldn’t object to this at all, as long as dividend income remains taxed as income – as Tim often notes, a company is a convenient legal fiction that doesn’t pay anything in its own right); 2) companies who are either honest or too small to set up complex dodging arrangements pay corporation tax in line with the letter and spirit of the law, while companies that are dishonest and large get a competitive advantage at their expense?

    James: maybe 200 years ago you could have claimed that; in a complex global financial system, it just doesn’t work.

  11. John B

    I don’t have much faith in democracy.

    Small businesses pay their tax? Like plumbers and builders, you mean?

  12. @JohnB et al, I suspect corporation tax is there to ensure that foreign owners pay some tax on their UK-based profits. That is if there are any after the company has bought one coffee bean from an overseas subsidiary (where taxes are lower) for 99% of the year’s profits.

    It seems reasonable enough, given that us workers have to hand over >50% of our pay to the government, that the nasty capitalist exploiters [caution: irony] pay some taxes too. Rather than move to a zero income tax jurisdiction (or have a family member do so) and have that profit stream subject to no tax whatsoever. Sure – the usual things about all tax being abhorrent and deadweight costs, disincentives to investment and whatnot. But it ain’t morally right to burden the workers and not the capitalists. Really, it isn’t.

  13. James: maybe 200 years ago you could have claimed that; in a complex global financial system, it just doesn’t work.

    John B – so if I export a pound from this country to another, that pound just vanishes forever? Or mutates into…what?

  14. Kelly: the Revenue is having a big crackdown on cash-in-hand types. Easier to catch and with much worse lawyers than big companies.

    JamesV: in practice, privately held companies can already avoid tax. They don’t even need to be multinationals, as long as the owner doesn’t mind living in a tax haven for a while. Let’s say I’m a Swiss squillionaire with a private Swiss company, which buys a profitable UK company called, say, Balliance Oots. I get Oots to borrow money from its banks so that its interest payments will be roughly equal to its annual gross profit, I pay the entire proceeds of the bank loan to the Swiss company as a one-off dividend, and then the Swiss company uses the dividend to buy the outstanding loan from the banks. Ongoing, the company makes little or no UK net profit and so pays no corporation tax, but it pays my Swiss company interest roughly equal to the annual gross profit. Bish bosh. As long as I’m not UK-domiciled or UK tax-resident, there’s nothing much they can do about this.

    Plcs can’t avoid tax in the same way, because most shareholders in plcs don’t live in tax havens. But for plcs, it makes no difference whether the shareholders get taxed on the dividends the company pays them, or whether the company gets taxed.

    James-not-V: since currency is fully convertible and largely electronic, with far higher volumes of forex traded than actual money in circulation, Christ alone knows what happens to it. Probably disappears in a computer algorithm screw-up at some point…

  15. john b (#1), there is a 3rd likely explanation.

    That running a coffee stall makes diddly squat, after you’ve paid for the staff and management.

    Probably reasonable – how much profit would you make from a non-chain coffee stall, after allowing a notional salary for your labour and management time?

    Therefore the profit comes from the global nature, the chain, the marketing, the fact that people from any country can walk into a UK Starbucks and get a recognisable product.

    For Costa that is owned in the UK and therefore taxed here. For Starbucks it isn’t.

  16. To repeat myself (as I often do) Isn’t this all just a big distracton from the issue that governmnet spends too much of our money? Focus on who isn’t being taxed enough instead and the wasteful and ruinous levels of spending slip past unquestioned.

  17. john b

    “So what exactly are you anticipating will account for the required major differences between cashflow and profit here, in a business that sells for cash, pays its main costs (ie staff and suppliers) within weeks, and has little capital equipment (hence little depreciation)?”

    Some examples would include:
    – shop refurbishing (lifetime of say 5 years)
    – machinery (they have some pretty costly coffe and other food processing machinery as well as dishwashers installed), again a lifetime of say 5 years or so
    – cashier equipment and centralised computer systems (again 5 years or so)
    – working capital: it doesn’t matter whether you pay in a few week, it will still impact your working capital if your business is growing

    just of the top off my head…

    The links provided by Alex B seems to say that they have a capital employed of 210mn GBP and a post-tax profit of -6.6 mn GBP. Just as a purely numerical excercise we can assume a depreciation of 5% Capital employed. That is assuming that net book value = gross book value and a blended lifetime of assets of 20 years. The combination of these two assumptions is of course a large understatement of the depreciation but serves well to illustrate that you are talking bullocks. We can furthermore make the following extremely conservative assumptions:
    – there is no change in working capital
    – there are no interest / other financial costs
    – no other adjustments are needed between net profit and net cash flow

    This means that the difference between net profit and net cash flow would be:
    5% of 210 mn = 10.5 mn

    Now, if the lifetime were 5 years (keeping all other assumptions flat), the difference would be 20% of 210 mn = 42 mn

    Conclusions:
    1) net profit is not equal to cash flow
    2) you are talking out of your arse

  18. Starbucks UK isn’t growing outlets significantly any more, and the vast majority of its sites have been open for several years. As you admit, it’s not a business reliant on vast expensive one-off kit investment. Capex will be distributed fairly evenly throughout the chain as refurbs occur. Which means it’ll be within a ball-hair of any given financial year’s depreciation bill. So no, none of the reasons you’ve invented will apply.

  19. Normally if somebody claims knowledge of an area I at least try to believe them, and hence don’t bother explaining obvious simplifications made because the detail is completely irrelevant; if you want to continue this discussion I’ll bear in mind not to do that.

  20. John b:

    “As you admit, it’s not a business reliant on vast expensive one-off kit investment. ”

    No, I didn’t say that, I said it requires refurbishment of sites and acquisition of expensive machinery which needs to be depreciated over several years. Therefore you can simply not say that cash flow is equal to net profit. Anyone who claims that opening restaurants or coffee shops does not require Capex simply doesn’t have a clue about what they are talking about.

    “Starbucks UK isn’t growing outlets significantly any more, and the vast majority of its sites have been open for several years. ”

    Note that this means exactly the opposite of what you claim it does. The fact that they have done most of their investments in the past means that capex is now likely to be significantly lower than depreciations.

    Cash flow will be lower than net profit during investment years and higher when investment finishes as you are milking assets. This is really one of the first lessons of any accounting / economics class.

  21. I use both Costa and Starbucks. Perhaps its just me but Costa always seem to have less staff on when I’m around than Starbucks. As in two or three less.
    Once at the front of the queue the service in Starbucks I’ve found to be quicker, though I don’t order exactly the same at each. Will staffing costs affect net profitability?

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