Wouldn\’t it be interesting if journalists understood the tax laws?

The retailer dispatches online orders destined for mainland Europe from the UK but bills the transaction to Ireland, according to documents seen by the Guardian.

In a structure used only for overseas sales, the company’s UK warehouses sell goods to Marks & Spencer (Ireland) Ltd at wholesale prices, allowing M&S to pay Ireland’s 12.5pc rate of corporation tax, the lowest in Western Europe, on any retail mark-up.

Such arrangements, known as “transfer pricing” are completely legal but have drawn heavy criticism in recent months. Tax avoidance is set to feature high on the agenda at next month’s G8 economic summit.

M&S is a UK domiciled company. So doing this doesn\’t save it any tax at all.

It might delay or defer a tax bill, but it doesn\’t reduce it.

For any profits that are brought in to the UK so that they can be paid out as dividends (which is the purpose of the whole game, after all) will be subject to the UK corporate tax rate minus the corporation tax that has already been paid. If they don\’t bring it in but reinvest it in the business, well, there are enough tax breaks and investment allowances that they wouldn\’t be paying corporation tax on it anyway.

The important point to note is that using Ireland (or Luxembourg, Bermuda, whatever) does work to dodge UK corporation tax for companies not domiciled in the UK. It does not work for companies which are domiciled in the UK.

UPDATE: And wouldn\’t it be interesting if Timmy understood the tax laws?

14 thoughts on “Wouldn\’t it be interesting if journalists understood the tax laws?”

  1. So if there’s no advantage, why are they doing it?

    Tim adds: Who said there wasn’t an advantage? Deferral is an advantage: I only said that it doesn’t, over time, reduce the tax bill.

  2. Oh dear Tim

    Dividend income from a sub is non taxable in the uk. So Ireland can pay a dividend to its uk parent and no extra tax is due in the uk

    The Irish tax rate is not low enough to trigger the uk Cfc rules either

    So there is an advantage being the difference between the Irish rate and the uk rate

  3. Anth is right: this structure apparently carves out sales to non-UK customers and has them taxed in Ireland, with no UK tax on them.

    Which seems fair enough to me. If an independent company were to set up in Ireland, buy M&S stuff wholesale, and sell it to EU customers, then I wouldn’t expect the profits to be taxed in the UK.

    I would expect some royalty to be paid for use of the M&S name, though, and for other transfer pricing positions to be sorted out.

  4. This time I think they are all correct Tim, especially the estimable Pellinor. A dividend from an Irish subsidiary no longer attracts CT. As an alternative M&S could set up a PE in Ireland and claim an exemption for it. Where I would question the report is in the claim that the warehouse is selling the goods. Warehouses store goods ready for transport; they don’t as a rule sell them.

    My other thought is that this might have more to do with VAT than CT. However, I am not a VAT specialist and, unlike Ritchie, I’m not much of a blagger either.

  5. It’s all irrelevant. In any given year, the government wastes more tax on nonsense like Chinooks with the wrong computers, carriers with the wrong jets, NHS IT systems that just don’t work, or the Olympic Games than is evaded in a decade.

    A year or two back, it was decided that all primary school classrooms, certainly in our county, had to have a direct exit.

    In one school I know, there was a block of four ground floor classrooms, each with fully opening windows with three foot drops to the ground, and each opening onto the extremes of a corridor about 20ft in length with an existing door leading straight outside at each extreme end.

    In other words, had there been a fire all of the kids could have been evacuated within a matter of seconds, even if their own classroom doors had been ablaze.

    The approved builder quoted 14,000 GBP per door, and was given the job. (I’d just had an expensive hardwood double door fitted at my house for under three grand.)

    So, completely unnecessary, but then about 50 grand too expensive if you insisted on doing it.

    In one block of one school.

    The world has truly gone mad when we care about Google’s tax affairs in the face of this sort of stuff.

  6. VAT’s probably not so much of an issue: VAT’s not my main area, and Irish VAT even less so, but generally for business to consumer sales of goods VAT is due where the customer resides, at their local rate. So that would be the same regardless of whether the sale was made out of the UK or Ireland.

  7. @ Pellinor

    I was just checking the VAT rules.. as I thought that was the case. I think people get mixed up because of the issues around VAT on digital sales, and the LVCR business.

    As VAT is a tax mandated by the EU, could it be that it’s specifically intended to ensure some revenue in the state of the consumer, given that the single market means that they cannot tax the producer?

  8. The idea, as I understand it, is to make sure there’s a level playing field for supplies to the consumers – so you can’t undercut a French shop by selling to French customers from Ireland, for example. Or from the US, indeed.

    It breaks down for things like e-books because they’re defined as services, which is just a failure of the goods/services divide. But that’s a wider failure, not just a tax one: it extends to copyright and right to second-hand sales, and so on. Goods are tangible, so the CD I’ve bought is a good; the digital download isn’t tangible, so isn’t a good – but to me they’re essentially identical, so I’m a bit fed up with the different treatment of the two 🙂 No easy answers to that problem, though.

  9. Sophistry by you all!

    M&S are doing exactly what Amazon have done.

    Just as Amazon avoids tax in the UK where the sale takes place, M&S are avoiding tax in the UK where the sale takes place elsewhere.

    It’s exactly the same because they’re both avoiding UK tax.

    Morality only applies to UK tax.

  10. Interested

    I couldn’t agree more. A friend of mine who owned a retirement home (beautifully run, clean and with home-cooked food) sold up because new regs required all the door openings to be 800mm (about 2″ wider). It is now a private house, where the rule doesn’t apply.

    The trouble with bureaucracies is that their end product is ever more bureaucracy…

  11. Tim, you used to be correct but the law changed a few years ago.

    As usual, after the UK lost an ECJ case. Our old system of exempting dividends from one UK company to another, but taxing overseas dividends and then giving double tax credit, was held to be discriminatory.

  12. I’ve been stuck a car for 4 hours, waiting to write the thought that came into my head 5 minutes into the journey. I sit down expectantly… and find that Murphy Richards has put it far more appropriately than I ever could.

    On which subject; friends of mine based in Hong Kong are starting up a subsidiary near to Brisbane, Australia. Now it’s entirely legal for them to pay no UK CT but, Murphy Richards, is it moral?

  13. Could they have done it by setting up a UK company with no UK presence but a branch near Brisbane? That might have given them a UK tax liability – though they’d have to go out of their way to be sure.

    If given two alternatives one of which has a UK tax liability they have chosen the other, then clearly they are avoiding UK tax.

    I make no moral judgements, though.

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