The tax choices faced by companies


There are two lines of argument used by companies that are most aggressive in reducing their liability to UK corporation tax.

The first one is that they have a "fiduciary" duty to their shareholders (which broadly means that they can be sued or sacked by their shareholders if they wilfully reduce reported profits).

The second is that they do tons of other stuff for the community (so Google - which was criticised by MPs for paying relatively little UK corporation tax - flags up its contributions to an entrepreneurial hub in east London and its work with an education charity, inter alia).

But as directors of companies admit to me, all businesses have discretion about how they organise their tax affairs. The fiduciary duty on the directors does not oblige them to use the most extreme legal techniques to minimise profits and tax liabilities.

How so?

Well, there is what has been described as a "licence to operate" (an idea promoted by the Royal Society of Arts and the think tank Tomorrow's Company), which is broadly that the most successful companies over the long term are those that are responsible corporate citizens.

Companies perceived by people, politicians and media as, in some sense, not making a proper contribution to the societies from which they extract their revenues and profits, will over time become marginalised within those societies - even resented by the customers and suppliers whose goodwill they require.

So it is quite normal on company boards for there to be discussions about how zealous to be in avoiding tax - choices are available to businesses about where to locate costs.

And, to repeat, it is not always rational to maximise profits in countries where taxes are lowest and to maximise losses in countries where taxes are highest, if in doing so the licence to operate is eroded in a country where there are important customers.

tax protest UK Uncut has targeted companies it believes are not paying enough tax

This was the thinking behind Starbucks' highly unusual decision to donate £10m a year in "pseudo tax" to HM Treasury's coffers for a minimum of two years.

As a prominent business leader put it to me slightly cynically, that £10m was a "marketing cost" (which, who knows, might be offsetable against Starbucks's tax bill in another part of the world).

Starbucks felt more under pressure than most businesses to make this gesture because its hundreds of shops are natural targets for the kind of protests organised by lobbying groups such as UK Uncut.

But although Starbucks is more vulnerable than most businesses to such campaigning, it is not anomalous.

And some would say that in a way it has joined the ranks of the protestors, by highlighting the discretion that boards have to pay or not pay tax.

Which, of course, does not absolve the government from responsibility for writing tax rules in such a way as to prevent companies paying significantly less than the official corporation tax rate - which, of course, is not easy in a globalised world where businesses can move their domiciles and can shunt revenues more or less wherever they choose.

And here's the rub for the UK.

There does seem to be evidence that companies which think of themselves as British - by dint of who owns them - are more squeamish about minimising the tax they pay in the UK.

Or to put it another way, the further away a board of a company is from the noise of the press in the UK, the anger of social media users, or the angst of British politicians, the less worried that board will be about the perception that its company is not paying its way in the UK.

There may be a hidden cost of what has arguably been this country's central industrial policy of the past 30 years, which is that all businesses are for sale to foreigners at the right price: the systematic transfer into overseas hands of so many UK companies may have contributed to long-term erosion of corporation tax revenues.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 524.

    523 purple

    What do you mean swapping apple for orange? Do you mean the companies Apple and Orange?

  • rate this

    Comment number 523.

    Business & trade exact premiums. Swapping apple for orange is not what it is about. It is about paying interest on loans, dividends, tax, wages and loads besides. A cumbersome inefficient way of overheads and profit loss which justifies (controls) both investment (use of resources) and the exclusive networks.

    522 Sarah I believe Peston was at LSE recently. We is social and so are fads

  • rate this

    Comment number 522.

    520 purple
    Not so long ago I saw that the London School of Economics was highlighting the coffee-chain business like Starbucks as the model for students to copy. However, lately I watched a lecture from the LSE that warned that society may break down completely and everybody would be broken into their exclusive 'networks' - or 'gangs'?

  • rate this

    Comment number 521.

    "If not, please explain why HMRC take so many cases to court?"

    Use the other side of the paper to explain why so many fail or reach out of court settlements for a trifling amount the SEC demand.

  • rate this

    Comment number 520.

    518 Sarah ~ l don't think that the coffee shop concept is going to fail any time soon, but the leveraged and share price indulging corporate model may struggle if customers turn away. This is a corporate business and as such is a financially shrewd and debt encumbered affair. Are they up to the £5 cup of snob value elite cuppa yet? l doubt that will take long.

  • rate this

    Comment number 519.

    509. bungle99 ~ l find the improve yourself argument to be an arrogant falsefood of immene immensity. It is as flawed and selfishly elitist as are every one of those making money out of education and selling the elirist capital accumulation theories of profit and loss. That certainly is the world we live in but capitalists are wunderkind they are wimps who cheat profits, stealing from everyone.

  • rate this

    Comment number 518.

    514 John from Hendon - I definitely heard a reference to 'zombie businesses' with reference to Starbucks on the Andrew Marr show by one of the politicians a couple/three? weeks ago. They need to make us think they have loads to inspire confidence - offshore accounts may hide the fact that they have nothing..?

  • rate this

    Comment number 517.

    "All this talk about leaving the UK"

    Indeed. Can't wait....

  • rate this

    Comment number 516.

    UK tax law is deliberately weakly enforced on these big companies ... politicians always want to give their friends the money.
    ~ ~ ~
    You know that for sure? You have evidence? Take it to the CPS & notify the media about it.

    If not, please explain why HMRC take so many cases to court?

  • rate this

    Comment number 515.

    @477 Ginger
    Not poor behaviour - correct behaviour. We are advised not to give away personal info on Forums but I know a person ;-) ;-) who on starting a business went to HMIT (back in days when you could visit) and Inspector (no less) sat down & showed a better way to do accounts & t/return so less tax but the correct tax could be paid.

  • rate this

    Comment number 514.

    511.Sarah "zombie businesses"

    The zombies generally are the banks and the businesses being kept afloat with loans at the insanely nugatory levels that prevail at present. As soon as loan rates rise to sensible long term levels the zombies will die and then (& only then) real profitable business can re-start. At present the zombies are killing all real business. We need real Capitalism again!

  • rate this

    Comment number 513.

    All this talk about leaving the UK. Multi-nationals pride themselves on the global coverage they have, they are VERY unlikely to 'leave' a region as important as the UK, especially if they have to cite the reason for leaving as 'taxation' levels.

    They can't create the 70million consumers elsewhere so they must stay and work within the rules...and that's for certain what they'll do.

  • rate this

    Comment number 512.

    UK tax law is deliberately weakly enforced on these big companies ... politicians always want to give their friends the money.

    "5 companies control 80% of food in the UK". That's not competition, it's a cartel.

    We don't have a free market in the UK, we have a highly rigged market with the big companies giving perks to politicians, executiveships, wining and dining etc ... in order to corrupt.

  • rate this

    Comment number 511.

    What worries me further is I've heard talk of zombie businesses - or some such - are we sure that Amazon is making a profit with all that free packaging and free delivery for everything? Are we sure that Starbucks is - it may be busy in London - but some of the other venues? How do we know they are not really charities?

  • rate this

    Comment number 510.

    "Saw Nazi/sun whatever sign on start of video then switched it off."

    Do you remember World in Action? The intro featured Leonardo da Vinci's The Vetruvian Man. I don't recall the program itself being specifically about da Vinci or his famous artwork/scientific studies much...

  • rate this

    Comment number 509.

    Being a serf is a choice for most. A person is an asset with a value and to increase ones value you have to either educate yourself to a level where you can be paid enough not to worry about this stuff or educate yourself to a level where you can get away with paying a lot less. Anyone bleating about not having enough has failed in one of the above or simply not tried.

  • rate this

    Comment number 508.

    "it is not always rational to maximise profits in countries where taxes are lowest and to maximise losses in countries where taxes are highest, if in doing so the licence to operate is eroded in a country where there are important customers."

    PR related 'tax' payments still add to operating costs and so will be subject to rigorous analysis by company owners.

    High cost nations repel business.

  • rate this

    Comment number 507.

    Money Masters is good but overlong (3.5 hours). A similar but more accessible film is Secret of Oz by the same film maker (Bill Still) and it's only an hour and a half. It's got an interesting tale to tell about the Wizard of Oz too! Oz = ounces (the way in which gold and silver were measured). Yellow Brick Road = Gold Standard. Why is Dorothy wearing silver slippers in the book instead of ruby?

  • rate this

    Comment number 506.

    Stuart Wilson@505 clicked on the first youtube video link you provided - saw something about the Zionist conspiracy on the right hand side offered as video. Saw Nazi/sun whatever sign on start of video then switched it off. The thing is, what's all this about the Bildersberg Group anyway - someone said that the man to be Governer of Bank of England is in the Bildersberg Group...?

  • rate this

    Comment number 505.

    "is the Moneymasters the same as the Masters of Money - a BBC programme covering Hayek, Marx and Keyes?"


    Ignore the text at the bottom right :-/

    Follow up.

    Research both. The slight irregularities between both are also illuminating... Don't take them as gospel.


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