Tax Avoidance; how do big companies escape paying tax?

Big companies like Starbucks and Amazon makes millions of pounds each year. Yet somehow they seem to be paying less tax than the rest of us. Say what?

 

Tax avoidance 101: what do companies pay tax on?

Companies in the UK must pay corporation tax. This is a tax on the profits a company makes. It’s worth mentioning that profits are not the same as sales. Profits are your total sales, minus your costs. Basically what’s leftover at the end.

At the moment the corporation tax rate in the UK is 20%.

So if your company makes £100 in profit, you would need to pay £20 in corporation tax to HM revenue and customs.

All good in theory. Yet in reality many large companies are bringing in big profits, but paying low amounts of tax.

[SOR tax evaders video]

According to charity group Actionaid the UK’s top 98 companies are using tax havens. These are countries which offer businesses and individuals low tax rates.

Errr… how do big companies end up paying so little tax?

Two key terms: tax avoidance and tax evasion. They sound the same, but are actually very different.

Tax Avoidance - Scene from "Empire" I don't do taxes

Tax Evasion and Tax Avoidance – know the difference

Tax avoidance is legally using loopholes in the law to reduce the amount of tax that you pay. We’ll repeat again, legal.

Tax evasion is illegally escaping paying taxes, usually by hiding your income.

When we hear about big companies in tax scandals, we’re probably hearing about tax avoidance. In these cases the companies haven’t broken the law. They’ve just worked the system to lower their tax bill. Sneaky or what?

There are a variety of ways that companies can legally lower their tax bill. Most involve lowering profits – as low profits mean you pay less tax.

However, if the profits were actually lowered then the company would be making less money. Cue lots of anger from investors.

Stephanie Flanders from the BBC explains how moving money around within a company can reduce profits (therefore reducing tax) and save you a lot of £££.

 

 

Still confused? Tim Bennett from Money Week goes into a little more detail;

 

In nutshell: UK section of the company buys and sells to other branches overseas – the cost of doing this reduces the company’s profits (which reduces the tax bill) while most of the money remains within the company.

Or in other words: UK tax law is a f@%king mess.

 

Why should I care?

People get very angry about big business seeming to have an opt-out from paying taxes, whilst most mere mortals have no choice in the matter.

Tax Avoidance - TV host Jimmy Fallon looking outrages

People be like “WTF, mate”

The current debate over tax avoidance erupted around the time of the Occupy Movement. This is an international organisation campaigning against social and economic inequality. Occupy’s slogan “we are the 99%” highlights how the 1% minority seem to play by different rules to the rest of us.

Large companies can afford to pay teams of legal experts to find potential loopholes in tax law.

They can also afford to set-up and run their business from countries with lower tax thresholds. Both of these are options that smaller companies potentially don’t have.

 

 

Big companies be like "err.. we do pay tax.."

Big companies be like “err.. we do pay tax..”

Our taxes pay for public services like roads, schools, hospitals and the police.

Anti-tax avoidance campaigners argue that companies avoiding paying tax are depriving the country of money which goes towards these things. They believe that companies which operate and benefit from a country should all pay the same tax as the rest of us.

The Robin Hood Tax idea goes even further, suggesting we should charge a tax on all large financial transactions which would pay for public services.

However big multinational corporations say that they do pay the correct amount of tax. Legally this is true. Who’s to say whether this is a “fair” amount or not?

 

As Toby Young explains there is no real definition of a “fair” share of tax. Therefore if we think the fair share is actually higher than the rate set by the government then everyone who fails to volunteer to pay more tax is guilty of tax avoidance. Slightly awkward.

 

Tax Avoidance - a group of people raise their hands

Hands up who’s avoided tax buying stuff in Duty Free?

There is also the elephant in the room – that most of us have probably avoided tax at some point in our lives.

Picked up some cheap booze at the Duty Free stand after a holiday?

Yep, that’s technically avoiding tax. Perfectly legal though.

So, do we only care about tax avoidance when it is large companies involved? If so, there’s something of a double standard going on here.

 

Even if it seems like tax avoidance is bending the rules, a 1936 court case sets the precedent that this is fine. A ruling by Lord Tomlin on the Duke of Westminster’s tax arrangements stated;

 

“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

Meaning: people may not like it but as long as you’ve stayed within the law then it’s all good.

 

What to do next?

Boycott Starbucks over tax evasion

Is boycotting a long-term option?

Many people who disagree with tax avoidance protest by boycotting the company involved.

For Starbucks this is easier than you think. I’ll just get my soy double shot espresso macchiato from another shop. Amazon? OK, fine, I’ll have to do my shopping in real life. Slightly annoying but all for a good a cause.

Boycott Facebook? Riiiight, so how are people going to see my latest selfie?

How about Google? WELL HOW THE HELL AM I GOING TO KNOW HOW TO GET ANYWHERE??!*

Sooo… boycotting may not work long-term.

However, you could write to your MP raising the issue, or join any one of the many organisations campaigning against tax avoidance. Or maybe you think the tax system works just fine. Let us know in the comments below.

 

* We hear great things about paper maps.

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