Should you give up your Frappuccino? Tax avoidance in the UK

Before we go any further, I’ll have to say that I’ve never had a Frappuccino; or for that matter anything sold by Starbucks that is not a straight forward Espresso. For me Starbucks is the absolutely last option – I visit their coffee shops only when there is nothing else and I am really desperate. In 2012, I believe I went to Starbucks once and this was in Santiago, Chile – there was no other coffee shop in sight, you see.

This, however, is not about the quality of their coffee but the news item that hit the headlines about a month ago: Starbucks being the second largest global restaurant or coffee chain after McDonalds (don’t even get me started on the food that this one serves) and having operated in the UK since 1998 through 735 outlets has paid only £8.6 million in taxes (mainly because some deductions were not recognised). And you know what?

We in the UK have bought from Starbucks stuff worth over £3 billion ($4.8 billion) during this time.

This is what makes the headlines; and Starbucks are by far not an isolated case. Companies have been ‘named and shamed’ for tax avoidance in the UK with alarming regularity and frequency. There have been reports about other large multinationals like Facebook, Google, Apple and Vodafone ; then, of course there are also Boots and IKEA (though we should probably let Swedish people worry about the last one). The practice of tax avoidance seems to be rife; so should we care?

 

Anecdotally, existing reactions seem to fit between boycotting the companies and showing complete lack of interest. I have friends who over the years have stopped using Facebook, don’t shop any longer on Amazon (and all companies associated with it) and their shadows don’t darken the threshold of Boots. Which is a pity because, Facebook aside, by doing this their lives are gradually becoming unnecessary harder – they live in the country and having their books and movies delivered was rather handy.

Also, the other day I was listening to a programme on the radio and heard some random interviews with people regarding their reactions to Starbucks paying very little tax in the UK during the last 14 years. Whilst some people heroically stopped their daily visits to Starbucks (which is not good for your health or your wallet, btw) as a form of protest, others were very open about the fact that ‘they don’t give two monkeys’ about whether or not the chain pays tax in the UK or not.

So, let me put forward two kinds of arguments here: a) that we should care; and b) that it shouldn’t concern us. After that I’ll get back to the matter of whether you should give up your Frappuccino.

We should care

It seems to me that each and every one of us should care that large multinationals are avoiding corporation tax in the UK for pragmatic and ethical reasons.

Let’s discuss the pragmatic reasons first. Naturally, these are about money. Now, most, if not all, of the money that the government has comes from taxes. Data show that in the UK the highest proportion of the budget comes from income tax (29%), followed by national insurance (NI, 19%) and value added tax (VAT; 15%). Forth on this list is corporation tax – it constitutes about 9% of all taxes and is in the region of £50 billion.

Taxes feed the budget and pay for health, education, the universities (decreasing proportion), defence and infrastructure; not to mention the welfare state which is, I believe, one of the greatest achievements of the 20th century. It works a bit like your ‘home economics’, really – the more you bring in, the more you could spend on the services and goods you need. This, of course is assuming that governments don’t waste the money raised through taxation (which may be an assumption too far but this is a different matter).

Hence, corporations avoiding paying tax in the UK affects us directly by reducing ‘the income’ of government and how much it can spend on health, education, defence and the infrastructure. Relatively, the amounts may seem trivial but Vodafone arguably avoided paying over £6 billion in tax; can you imagine what this amount of money could have done for the nearly broke health service?

Moving to the ethical, we should care because not paying tax is wrong! As simple as that! This is not only a matter of law; there is basic human decency and responsibility involved as well.

Companies not paying tax in the UK shouldn’t concern us

I believe that there are three reasons why this shouldn’t concern us: a) tax avoidance is inherent to running a business; b) these companies contribute to the UK economy; and c) no law has been broken.

Running a business, a prosperous one, is about maximising profits and this goes hand in hand with minimising expenditure. Hence, avoiding tax is at the core of running a successful business. I may disagree on many issues with Boris Johnson but he nailed it when he said ‘I cannot exactly blame the finance directors of these companies for doing their job…their salaries and livings depend on minimising tax…’. Tax avoidance is part of the business!

Second, these companies may have succumbed to tax avoidance but they do contribute to the UK economy: they provide jobs thus saving on social security and increasing the income tax part of the budget.

And third, as Starbucks rightly pointed put when accused no law has been broken or regulation breached. These companies do act within the law.

How about this Frappuccino then?

The jury is out on the relative damaging effects that tax avoidance by large corporation has on the UK economy and our lives. What is important is that tax avoidance is ‘natural’ for any company aiming to maximise profits and the UK regulation allows such behaviour.

Giving up your Frappuccino is directed at the wrong party and is bound to have limited effect. It would be better to put pressure on the government to revisit the relevant regulation rather than attack companies and people who were doing their job; and doing it well.

I still think you should give up your Frappuccino but not to boycott tax avoidance! You should give it up to assert your good taste in coffee.

 

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