Why the move by Starbucks has muddied the water – and why Treasury and Parliament have ended up with muddy faces
“Righty-ho, not going there again” was my response on the news of Starbucks’ colourful tax arrangements. As ‘brands’ of coffee go, it’s Cafe Amt I rate as number one, but they are only found in mobile-ish outlets. Independent coffee outlets tend to be more hits than miss, but other brands bar Costa, I tend to avoid like the plague. More coff/cough than ee.
There was the fiery hearing at the Public Accounts Committee where Margaret Hodge and company went after the likes of Google, Amazon and Starbucks – the conclusions of which are here. For those of a pro-business disposition, this was little more than a hatchet job by a bunch of politicians looking to penalise firms who were otherwise not breaking the law. Which in one sense is a fair point. If you have a Milton Friedman outlook on the world, other than making good products/services to a higher standard and a lower cost compared to competitors, so long as you are not breaking the law what other business does the executive or legislature have in your affairs?
The problem Starbucks faced is that the issue of tax avoidance (definitions are here – let’s not confuse them please) is big news. That it is very wealthy individuals and corporations are seen to be undertaking such activities at a time of economic strife has made it both a political and a consumer issue. Under the threat of both a consumer boycott and UKUncut and friends threatening to blockade around 40 of their outlets in the run up to Christmas, it’s like 2010 all over again. Then Starbucks climbed down, ‘agreeing’ to pay more tax. This had some pro-business people saying that Starbucks were potentially breaching their duty to maximise profits for shareholders. (Richard Murphy citing S172 of the Companies Act 2006 disputes this, saying it’s open to interpretation).
What complicates things is that there are two competing pressures. One which is the desire of some big firms to make use of the loopholes while at the same time facing possible consumer boycotts if they are found very publicly doing so. The online and dominant nature of Amazon and Google in their respective markets make direct actions much more difficult than Starbucks – the latter are on the highstreet. It only takes a handful of people to close a store or fill it with enough people (even if they are sitting down reading) to put people off from going in.
So…what to do?
Actually a number of people have been saying that firms should not have been in the position where they had to make the choice in the first place. Close the damn loopholes. The only institution that can deal with stuff like that is Parliament – and with it the Treasury whose ministers lay the detailed financial legislation before Parliament. Yet for years the PCS Union were lobbying the then Labour government (to no avail) to clamp down on tax avoidance. Fast forward to 2010 and a group of activists launch a movement that goes viral and puts tax avoidance at the top of the political tree – where it has remained.
“Let’s put that in the ‘too difficult to deal with’ tray”
The “Office of tax simplification” carried out an “independent” review of 1,042 different tax reliefs. I’ve put the word “independent” in quotation marks because there’s only so much independence you can have if your website is hosted by a Whitehall department of the minister that set you up, and your email address is on the .gsi network. Having such a set up and claiming it to be independent (even if ministers and their policy civil servants had no contact with them) actually undermines the trustworthiness of both because it implicitly acknowledges that the public do not trust the department itself.
But that aside, let’s have a look at what it said about the 1,042 reliefs it examined. At the top of page 8, it says that they decided not to review 883 of the reliefs. Hang on a minute, they said they were having this big review and then decided not to review nearly 85% of all the reliefs listed? REALLY?!?
Given the time and resources they were blessed with, the reasons they give for not examining them are reasonable. The issues I have is that the task for undertaking a review should have been given far more time and should have been done either by Treasury officials reporting to ministers, or ministers should have commissioned an organisation with the expertise but outside of Whitehall to do the job instead. It should also have looked at those things in the ‘too difficult to deal with’ pile.
The ones where there are existing consultations going on raise questions about co-ordination and sequencing of activities. Could they not have all been rolled into one? Perhaps, perhaps not. On the issues of VAT & international agreements, this is where such a review in my opinion should have looked into. Why? At least then we might have had some insight into what barriers exist internationally and what co-ordinated action internationally might need to be taken to overcome them. At least that way the problems would have been scoped and fleshed out so that people could understand them a little better.
So yes, more time, more resources, more expertise and a greater scope. Because as we found out with Laidlaw’s review into the West Coast Franchise debacle, if your timetable is too tight and you’re in the process of both major cuts and competing projects, things are more likely to go wrong. (See para 3.12 of Laidlaw here). On an issue such as tax avoidance, in more ways than one we really cannot afford major screw ups.
Well…as always I don’t really know. I don’t think the problem will go away anytime soon. If anything, I wouldn’t be surprised if the EU were watching with interest. Given the financial pressures across the Eurozone, the temptation for the EU to seek to declare itself as having competency for multinational corporation taxation and/or seek powers to levy a top-up tax on firms or brands operating in more than one EU state must surely be tempting. (Not that the UK would agree to such a thing). I also can’t see backbench MPs or peers being willing to table comprehensive legislation to try and force the Coalition’s hand either. The simple case being that tax law is very complicated. Drafting legislation is terribly complicated – let alone interpreting it & trying to defend it.
One group of people I feel a little sorry for are the people who work on the frontline and/or for the franchises. It’s not their fault that those responsible for the brand at the top have acted in the way they have. It’s not their fault that MPs singled out the brand that is plastered all over their place of work. For many of them on low wages, it pays them just enough to make something of a living. Prior to my civil service days I spent some time in a cafe in a department store I worked in. It was bloody hard work (due to management incompetence not hiring enough people – hence being brought in untrained to help fill in) for very little pay and with generally unforgiving customers. Questions remain as to whether the hit Starbucks take on taxes will be taken out on their already hard-pressed low paid workforce. (This little tool has some interesting comparisons).
So yes, Starbucks have had their brand dragged through the mud – and I’m sure they won’t be the last. 38 Degrees are going after this lot. But asking big corporations very nicely to pay up isn’t the solution. The solution has to come from sorting out tax law. The only competent body to do that is Parliament. It’s all very well MPs and politicians saying “We need to reform the law”, but which one or group of you is going to sit down and do the leg work?
UPDATE 7 Dec
Margaret Hodge has tweeted a further comment – will we see Parliament taking a lead?