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?
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.
Two key terms: tax avoidance and tax evasion. They sound the same, but are actually very different.
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.
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.
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.
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.
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.
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.
HSBC Rebrand = Hide Scandals, Become Credible? The bank may be about to stage a massive disappearing act.
Big bank HSBC is getting rid of 50,000 staff members across the world; 8000 of these from the UK.
Instead of face to face contact, customers can look forward to more online banking and “self-service”. We’re hoping self-service means you can just help yourself to money whenever you like.
HSBC is also reviewing whether they should move their HQ out of the UK. The bank’s UK branches are going to be re-branded under a different name. Ooh, fancy.
HSBC stands for Hong Kong and Shanghai Banking Corporation. It was founded in Hong Kong in the 1860s. HSBC only moved across to Britain in the 1990s when they took over the UK’s Midland Bank.
Most of HSBC’s money comes from trading in Asia. At present they are losing money in the UK because of the Bank Levy. This taxes big banks on their profits and hit HSBC hard last year. They had to fork out £750 million to the tax office. Ouch.
So… it might make sense for HSBC to go home to Asia. But don’t panic HSBC customers; no decisions have been made yet.
HSBC decoded: If HSBC leave it will be a big blow for the government’s money-man; Chancellor George Osborne. He’s been struggling to keep banks and big businesses happy in the UK. Everyone worried about businesses leaving because of the EU referendum. If they do, it could damage the UK economy and mean fewer jobs and dollar for everyone. HSBC’s decision could be crucial.
HSBC’s UK high street branches are to be “ring fenced”. This means people’s deposits and mortgages are separated from the bits of HSBC that trade on the financial markets. The idea is that by keeping them separate your money is safer. These rules were brought in after the financial crisis.
The HSBC rebrand means UK branches will launch under a different name. For the banking world this is like Coca Cola changing its name to something like Lilt or 7UP. It may be big news but the product being sold is still a fizzy drink. Change the name of a bank… and it’s still a bank.
The press has reported several scandals involving HSBC in the past few years.
The Guardian reported HSBC’s recent fine for money laundering charges. Money laundering takes money gained illegally (e.g. drug money, stolen cash) and makes it look as though it was obtained legally.
HSBC’s Swiss branch was supposedly also found to have helped people avoid paying tax by hiding their income from the tax man.
This doesn’t mean all bankers are crooks, but it definitely wasn’t good press for HSBC. Is the planned HSBC rebrand an opportunity to distance themselves from the bad vibes? Not according to them:
“We will operate with a different brand name… The reason for doing it is actually so that clients are aware whether they are dealing with the ring-fenced bank or the non-ring fenced bank. Obviously if both are called HSBC it’s a bit confusing… It’s more about clients being able to work out which one they are dealing with than it is about anything else.” – HSBC Chief Executive Stuart Gulliver, speaking at a HSBC investor update.
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