Behind the till of a small, independent, coffee shop in London is a sign saying: ‘support your local business, we pay enough tax to fund one nurse and one police officer. Buying more here will mean we pay more’. This provides a sharp contrast to Starbucks who appeared before the Public Accounts Committee last month claiming to have traded at a loss for 14 of the last 15 years, and so avoided paying the tax it’s customers expect.
The UK Tax Gap – the difference between the tax actually collected, and that which should have been collected, stands at £32billion pounds.
This is more than the annual budgets of the Home Office; Department of Transport; Foreign Office; Department for the Environment, Food and Rural Affairs; Department for International Development; Department for Energy and Climate Change and Department for Culture Media and Sport, combined.
It is understandable therefore that companies who use seemingly artificial arrangements will face a public backlash. Starbucks has been a prime example, and its sudden willingness to change its business structure to pay UK corporation tax, after having a light shone on it by the Public Accounts Committee, will be based on nothing more than a desire to limit any effect on sales.
This move is of course welcomed, and other businesses should perhaps now think whether it is time to do the same. As the public become increasingly aware of this issue the question on the CEOs lips in relation to tax should no longer be: ‘what is the minimum I can artificially arrange to pay’, but ‘what impact will these arrangements have on our customers and brand’.
Businesses have a duty to deliver the best return for their shareholders, and of course it is entirely rational to minimise the amount of tax paid. However, it appears that companies are stripping out profits in one country by falsely valuing services provided from another of their companies located in a low tax country.
The growth of fair-trade or environmentally sustainable products show that once an issue is in the public’s consciousness consumer behaviour is used to drive corporate behaviour and as a result drive sales. Smart companies should take this point on board now.
Customer pressure is however no panacea. It works well in a market with easily substitutable alternatives, like your choice of coffee shop. Yet for the likes of Google or Amazon who enjoy such dominance in their respective fields I doubt this will have the same impact.
Therefore, the government also needs to take action and I am pleased to see that George Osborne has committed to more rigorously enforcing the rules we have and to investigating whether we have the right rules internationally. If Amazon has a co.uk website , a UK warehouse, and UK invoicing, is it reasonable to still say that the point of sale is Holland – and tax paid there – because the website is owned by an Amazon company located there.
Britain must be attractive to business and with the Government decision to cut corporation tax sent out this message clearly. We have one of the lowest rates in the G8 and are amongst the lowest in the G20. However, we need to be fair to all businesses and it cannot be right that the Treasury is missing out on vital revenue which the current rules clearly intended to provide.
A combination of consumer pressure and government action can reduce the tax gap. Starbucks is belatedly facing up to this new reality and no doubt others will follow. Small independent shops should not be paying a higher rate of tax than US multinationals, nor should they need a sign to highlight this unlevel playing field.