burning money

Extreme Outsourcing – PeoplePerHour

For better or worse, I get to see the accounts of about 100 SME’s in detail on a regular basis, usually all the way down to a transactional level. Unlike publicly listed company reports, where detail gets cumulated away, you get to see the finer details of what money gets spent on.

In the “outrageous, but uncontrollable” category are:

  • business rates, which, certainly in London, have reached ridiculous levels (as a percentage of rent).
  • Employers National Insurance, now at 13.8%, which is a nonsense.

In the “outrageous, but controllable” category fall a few things that I still struggle to get my head around in value terms.

The first is website development. The prices being paid relative to the quality of what is being built for any commercial entity is still out of control. I could understand it in the Y2K era when HMTL was new, and tech specialists were thin on the ground.

My favourite addition is “monthly maintenance fees”, as though its some sort of wear and tear asset like a car, instead of a program they’ve developed with holes in it.

Another is bespoke, specialised or advanced software. Well, it’s called bespoke, but what it usually is is 95% pre-made, with a few alterations available from a small list of fixed options. From my experience, for every costly added feature that’s included, there is an equal and opposite trade-off involved that restricts something you’re getting now or is available elsewhere. And when a basic, no-brainer, ‘feature’ is absent, you’ll be told “We’re trying to figure a work-around for that” (you’ll be working around, not them) or “We’re looking at that for the next release”.

The reasons it’s not bespoke is that the supplier only wants to make it once, with the only costs in sales and training – that’s the beauty of software.

Of course, tacked on to the cost of this is usually a consultant to “integrate” the software with whatever you’ve got going on in your business already, or mandatory fees to “train” users.

Search Engine Optimisation consultancy is a magnificent business example of “in a world of blind men, the one-eyed man is king”. The work guarantees no income for your business (and so is never tied to that), just promises better results on search engines and if you’re lucky, more visitors to your site. Of course, Google is smarter than any SEO consultants, and promotes sites based on – shocker – their usefulness to those searching. The better your business or relevance to searchers, the more visitors you’ll get. It’s an unspoken fact that nothing artificial is going to be effective on Google for long: Google constantly changes their algorithms. Get your basics tags and metas right (matching popular searches relevant to your business), and you’re wasting your money paying for anything else except what will improve it for customers.

The problem in all three areas is that, quite understandably, no-one on the buy side has any real understanding of what’s going on or how it works, so once someone has decided “we have to have it”, you’re hooked. Software, SEO and web development is on every predecessor’s P&L, so, good golly, we’d better add it to our budget!

The final one, and probably the most inexplicable that I see, commonly with no relation between the bills and results, is PR retainers. Bills roll in each month (prepaying for the next month) for £3k, £5k, £10k, in most cases for zero results, but probably worse, when there are “results”, they bear no resemblance to the fees paid. And I’m not saying that because the results are (as you’re told) hard to measure, but because its a phenomenally overpriced industry for the value provided. Yet the bills get paid month after month.

In each of the above four cases, the prices you’re paying – and this is critically important in business – aren’t tied to the benefits you receive or the results you achieve. They’re usually looked at by the buyer as a “cost of doing business” or something “we have to have”.

The seller isn’t pricing on benefit or results, they’re pricing on their costs: they’re covering salaries (which are based on living costs and/or lifestyle), employment costs, office costs, marketing costs and salespeople.

And in each of the four cases, the seller shifts the risk from themselves to the buyer with fixed fees, and payment in advance.

You can’t blame the sellers for this – its great business for them, and they’ll charge whatever the market will bear.

When you see buyers spending time and energy being aggressive about stationery suppliers or insurance renewal quotes, it boggles the mind to see payments made without question on website development, software, SEO and PR.

Anyway, rant over. My point was – and I do have one – is that if you really have to have them, chase the best value for money for them. I’m amazed at some of the commercial quality and low prices for services listed on People Per Hour.

Our companies have bought some amazing services at incredible prices the last twelve months after searches or putting buyer listings on that site – largely due to the huge numbers of suppliers without business rents, rates and so on price in. PPH act as the intermediary, providing a safety net: when you accept a bid, you use your credit card and put the deposit or invoice amount “in escrow”, and its not released until you accept that the work is done to your satisfaction.

The seller usually has no business overhead to cover, and just price for their time. They fill “trading gaps” with business from People Per Hour, and while many do it permanently, many are between jobs, on maternity/paternity leave or simply retired. I also find you get a broader range of services on offer, the business matters more to them, and at a fraction of the price.

Give it a look next time you’ve got to buy something for you business. Go to the site, and put anything you’re trying to price in the search box – you’ll almost certainly be amazed at the prices and quality on offer. Touch wood, we’ve had nothing but great experiences.

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Multinationals and UK Tax – Part 4: AMAZON

You can read the intro to this series here, as well as blogs on Starbucks and Google.

Amazon was the third multinational company to have their UK Corporation tax liabilities questioned last year, predominantly in articles in the Guardian. Amazon is a US conglomerate, employs 15,000 people in the UK, has a number of warehouses here, and of course, sell to UK customers in huge numbers on a daily basis (somewhere between £2.3 billion and £3.2 billion in 2011. However, the UK subsidiary recorded sales of just £147 million in 2011, paid £1.9 million in Corporation tax in 2011, and £1.1 million in the eight years before that.

You might be bored by these, but here are a couple of important notes:

  • It’s not correct to say Amazon “don’t pay tax” (or that they’ve only paid £3m in tax in 9 years). They also remit VAT on sales in the UK, and pay Employers National Insurance at 13.8% on all the salaries and wages paid to their 15,000 UK. They’ll also be subject to fuel levies and asset taxes like stamp duty. Corporation tax isn’t the only tax companies pay in the UK.
  • there’s no question they’re paying what they’re required to pay under the law, and HMRC aren’t contesting the amount of Corporation tax they pay.
  • taxable profits don’t equal accounting profits: companies can claim “capital” expenditure (instead of depreciation), and can also offset past losses against current profits.

What will explain the avenues of tax minimisation they’re taking better would be to ask why there is such a large difference between the sales of their UK subsidiary and the sales to UK customers,

The answer is that the sales made to UK customers are not made by the UK subsidiary, but by a Luxembourg company, Amazon EU Sarl. Being able to report sales in a lower tax jurisdiction should, in theory, allow a company to pay a lower level of Corporation tax, all things being equal (and they rarely are).

Amazon sells two types of goods – digital downloads of their “Kindle” e-books, and physical items, including paper books, electronics goods, toys, DVDs and clothing.

Amazon’s sales of Kindle e-books work the same as many multinational suppliers of software or electronic download items. For these companies to relocate sales is completely straightforward: they direct their Internet enquiries to a file server located in a lower tax jurisdiction, process the payment, send the bill including the local VAT charges where relevant to the customer wherever they might be, let them download the software, music or book.

Not particularly tricky, remarkably simple to do, and used by almost every “virtual” multinational company (and even some you’d consider ‘local’ companies who set up subsidiaries for this purpose).

The physical items Amazon sells are a little more questionable.

Amazon takes orders from UK customers on a website called Amazon.co.uk and then ships those orders from a UK warehouse using UK-based staff through the UK mail to a UK address, with the goods in question in some cases having also been made in the UK and having never left these shores. Despite all that, the bill printed in the UK to be sent in the UK parcel to the UK customer says it comes from a Luxembourg company, with the result that the transaction counts as revenue not for the UK company, but for the Luxembourg company. This applies not just for UK customers but for all of its European customers.

And here’s why it is allowed.

Most countries have a “double-taxation” treaty or agreement with other countries. These treaties are made with the aim of avoiding taxing income generated in one country and received in another two times instead of one. That obviously a valid (and necessary) regulation, without which we’d severely hamper international trade – it would be a lot harder to do business internationally if you were taxed twice on the same pound/dollar/euro/peso.

The key is the location of the company that makes the UK sales.

This is Amazon’s policy:
‘Amazon EU Sarl owns the inventory, earns the profits associated with selling these products to end customers and bears the risk of any loss. From Luxembourg, Amazon EU Sarl processes and settles payments from its European customers.’

In the OECD rules on where an entity is located does not include the use of facilities solely for the purpose of the storage, display or delivery of goods.

And so Amazon maintains that Amazon Sarl uses the storage and warehousing facilities that Amazon UK runs to store, fulfil orders and deliver goods that Amazon Sarl owns. Amazon Sarl pays Amazon’s UK subsidiary to run warehouses for it, paying a fee to do so (rather like Google Ireland pays a fee to its UK marketing arm).

All the physical goods are bought and sold by the Luxembourg company. The UK operation simply ships those goods for Amazon Sarl.

In 2011, Amazon EU Sarl made sales of £6.5 billion with 134 employees. The UK company, providing those logistics services for Amazon EU Sarl, had sales of £147 million, employing 15,000 UK workers.

Remember, the reason for a USA conglomerate to have a Luxembourg company collecting sales at all for the European operations is that profit earnt off-shore isn’t taxed in the USA unless its brought into the USA. And the USA headline tax rate is 35% (but with a number of exemptions).

It should be pointed out that, while European sales of £6.5 billion sounds like a big number, Amazon’s business model is very low margin. Globally, their margin was just 1.94% before tax in 2011, and if that margin is applied to Europe, profit before tax would be around £125 million – but again, taxable profits don’t equal accounting profits.

Unlike Google who said they were proud of their policies, and Starbucks who defended them and made concessions, Amazon did neither.

Keep in mind a couple of things when you consider why the UK doesn’t attempt to make some change to that:

  • they collect VAT on Amazon’s sales to UK customers. VAT brings in more than double what Corporation tax does.
  • The company employs 15,000 UK citizens, and pays Employers National Insurance on that. If, and a big if, Amazon were to move their operations off-shore entirely and choose to employ the residents of another country, they wouldn’t be paying that National Insurance, and 15,000 more people would need to find jobs. Payroll taxes including PAYE and NI bring in more revenue to HMRC than anything else (over half of total HMRC income).
  • UK companies benefit from the same rules too, bringing Corporation tax to the UK. If the UK opted out of the treaty, other countries would no doubt look to tax UK resident companies in the place of sales. With more than 80% of the FTSE100’s revenue coming from outside the UK, its not small potatoes.

 

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Multinationals and UK Tax – Part 3: STARBUCKS

You can read the intro to this series here, and read about Google here.

Starbucks has became the poster child for multinational tax “avoidance” in the UK, after a Reuters article in October 2012.

But bizarrely, of the companies publicised that I looked at, they seem to be doing the least dubious by some distance.

Since Starbucks’ UK subsidiary opened in the UK in 1998, the company has opened over 750 coffee shops, recorded over £3 billion in sales*, and incurred £8.6 million in Corporation tax. As much as anything else, what led to the Reuters investigation were statements from the group that the UK operations were profitable, while the company was showing tax losses in the UK.
(*Just on £1m of that was me, according to Finance Girl).

Starbucks, like most multinationals, don’t break out profit by country in their published accounts, so it’s not possible to reconcile accounting profit with taxable profit as an outsider.

I’m going to rehash some of the things I mentioned in a previous blog because they’re specific to Starbucks’ situation, and they’re probably worth repeating.

  • Starbucks have paid much more in “taxes” that contribute to HMRC’s coffers than the reported number of £8.6 million. In just the past three years alone they paid over £150 million pounds in VAT and Employers National Insurance (they employ 8,500 people in the UK). It’s false to report or say that they pay “no tax”.
  • In the case of VAT, it’s true to argue that the consumer incurs VAT (VAT is paid at the point of sale) – but for a retailer, in practice, this is just another cost (like coffee beans): a buyer doesn’t pay £2.00 plus VAT for a coffee, they pay £2.40, regardless of their VAT status.
  • There is no suggestion at all that they are not paying tax – they’re paying what they’re required to pay under the law in all forms of UK Tax. HMRC has no contest with what they’re paying, or even the cross-border methods they use that I describe later.
  • Accounting profit is not the same as Taxable profit. They differ in many ways, but the two key ones in Starbucks case are that companies are allowed deductions for capital investment (building stores, buying equipment, etc), and they are allowed to carry past losses into the current year. If you’re building 750 stores, and trying to establish a new business, those capital costs and losses count as deductions against your taxable profit. That’s the case for every single company in the UK, and as you can probably imagine, building 750 stores and establishing offices and a personnel infrastructure costs a fortune.

No-one is really arguing the toss on those points above – although they certainly don’t get reported as loudly.

There are three mechanisms used by Starbucks that are a little more complicated, and are worth explaining.

Cross-border transactions
One allegation against Starbucks is that it could be overcharging the UK subsidiary for goods and services supplied to it from other Starbucks companies in lower tax rate jurisdictions.

Like a lot of international companies, Starbucks makes its UK subsidiary and other overseas subsidiaries pay a royalty fee for the use of its ‘intellectual property’ like the brand and business processes – as much as 6% in the past, and now 4.7%. McDonald’s does a similar thing, charging its UK subsidiary around 5%, as do a great many companies.

This isn’t illegal, or unusual at all. After all, try buying a franchise where you pay for the brand and business practices – you’ll pay much more than 5%

In 2011, Starbucks UK paid £88.6 million in royalty payments to Starbucks in the Netherlands.

These are an expense in the UK, and revenue where the royalty fee ends up: the fees from Starbucks’ European units are paid to Amsterdam-based Starbucks Coffee EMEA BV, which is its European headquarters. Starbucks Coffee EMEA BV had revenues of 73 million euros in 2011, and declared a profit of 507,000 euros.

Starbucks UK also buys its coffee beans from the Netherlands company – but the Netherlands company was buying its beans from Switzerland, where no accounting information was available to show how much money was being made or lost. (Note: there are no coffee farms in Holland or Switzerland, just in case you were wondering why you hadn’t seen any).

Reuters suggested that Starbucks UK was overpaying in the UK for those coffee beans.

Transfer pricing between companies is perfectly legal, and incredibly beneficial to global trade. The actual level of the transfer price is valid if it is the price that would be paid between the two companies party to the deal if they were not under common ownership or control. While you can’t just trust a company’s say-so, Starbucks are adamant they work with all European authorities on the prices of these transfers, and no European operation has denied the right to use or charge the prices they do.

The UK subsidiary also pays interest on loans to the European headquarters. Again, this perfectly legal, and pretty common in conglomerates.

The assumption by Reuters is that, if anything, costs like royalties, interest and coffee beans that are charged to the UK that end up as revenue (or profit) in another European tax jurisdiction that has a lower tax charge on those particular items.

Unlike Google, Starbucks chose not to defend their practices. After the blow-up and (non-consumers) whining, Starbucks has offered to pay up to £20 million in Corporation tax over two years. On the face of it, that’s just insane, particularly in the way they’ve announced they’ll do it.

Starbucks UK will not, during those two years, claim tax relief for the royalties it is due to pay to other group companies, or for interest paid to other group companies, or for coffee bought from other companies. That’s as good a reason as any to believe they’re not saving much tax now by doing it. But it’s understandable as a PR exercise for UK whiners who think their missing out.

The other area is that Starbucks UK won’t use past losses against current profits or claim for allowances on spending on new stores and equipment. This is completely beyond my comprehension.

Ultimately, it seems that Starbucks is most guilty of reporting UK profits to group shareholders, when they’re not actually making any. From Howard Schultz, CEO and Chairman:

‘(Due to excluding intercomany charges like intercompany license fees and interest payments), we have communicated to shareholders that the UK has been profitable, albeit a small profit, while at the same time in the UK we had no taxable income to report, and thus no corporate income taxes to pay. Even if we excluded all intercompany license fees and interest payments, our UK margins in our most profitable year were in the mid-single digits, well below our targets and our most profitable markets. Our low profitability in the UK is completely unrelated to any kind of license fees or intercompany payments, it is unfortunately due to a number of historical operating and cost challenges, which we are working hard to change.’

Starbucks UK got the worst of the multinational’s beatings for doing the least wrong as far as I can see – and then are still going to pay an extra £20 million. They’re probably just unlucky that, unlike Google or Amazon, their product is in a competitive environment, demand for it is elastic, and protesters can camp outside, so it’s subject to pressure.

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Multinationals and UK Tax – Part 2: Google Inc

Read the intro to this series on Multinationals and the accusations of tax avoidance here.

What inspired me to write these articles was a question from a hairdresser I know, actually. With VAT, employment taxes, Corporation tax and personal taxes outweighing her take home profit by a factor of three to one, she asked whether, if she formed a Japanese company that bought her salon, she would be able to pay “no tax”, since she’d heard that’s what Starbucks do. I told her unfortunately, the VAT, employment and personal taxes would still be payable, and she’d need a complicated scheme, as a hairdresser, to avoid or reduce Corporation tax in the UK (and who knows what she’d be liable for in Japan). And Corporation tax is less than a quarter of her annual VAT bill.

Her suggested scenario though is more suited to what Google’s doing, rather than Starbucks.

Google’s method of minimising its UK Corporation tax is stunningly simple (and used worldwide aside of the USA).

You’ll know Google best for other reasons, probably, but Google sells advertising, and they do it brilliantly. They offer numerous free products to the world, including search, Gmail, Google Drive, Maps and YouTube with the fundamental aim of driving traffic to its advertising mediums – in the same way radio and TV have been doing in other mediums for the best part of a century.

We’ll address the UK first, but the method Google uses applies to pretty much all of its non-US operations.

In the year to 31 December 2011, about USD$4 billion (£2.5 billion, roughly) of their sales were to clients in the UK – or just over 10% of their global sales.

The accounts of Google UK Limited for the same year showed total revenues of £395 million though. And actually, that revenue figure was not advertising income per se, but technology support for the Google group (claimed as a cost elsewhere in the group – we’ll come to that) and sales commissions on those £2.5b of UK sales. As it turned out, that £395m in sales was not enough to raise a profit: it resulted in an accounting loss of £21 million before Corporation tax.

If you’ve been following along, you’ll note again that accounting profit doesn’t equate to taxable profit. Included in Google UK’s costs were share payments to employees that are not tax deductible, so the company actually paid UK tax of £6 million on 2011’s operations, at the rate of 26.5% on taxable profit.

So where do the advertising sales go?

Google argues, reasonably I guess, that its sales and profits relate largely to its search algorithm, which was developed in the USA in some bloke’s basement (possibly).

Mind you, the profits Google earns from sales in the UK don’t end up in the bank near their Mountain View campus – they end up ultimately with a company in Bermuda. There’s nothing legally wrong with a Bermudan company owning an algorithm and paying corporate tax in the location that best suits that Bermudan company* (*happens to be Bermuda).

But you can’t really serve an international giant with thousands of staff in Bermuda.

So Google’s international operations are based in Ireland. But then what happens in the UK?

Google say: ‘What the people in the UK do is provide services that are charged to Google Ireland. Those services are principally around promoting our products and making sure they work in the UK for UK consumers.’

Google UK Limited had 723 sales and marketing employees in 2011. But, to quote Google: ‘Everybody who buys advertising from Google – because that is how we make our money – buys advertising from Google in Ireland.’

That is, any advertising sales are recorded in Ireland. We’ll see why in a minute – and it’s not because of a cheaper corporate tax rate.

They’re not just faking that – 3,000 people in Ireland work for Google. Those 3,000 people in Ireland serve the whole of the world, bar the USA, with 723 Google marketing people in the UK supported by 268 admin and management staff.

Google ensures that all sales contracts be completed online from Ireland, and HMRC accept this arrangement. The result is that Google Ireland technically has no presence in the UK at all. All UK incorporated companies are deemed to be tax resident in the UK, but because the sales of Google adverts to customers in the UK are legally generated by Google Ireland, they are not taxed in the UK.

The UK agents earning commission on sales are considered to be in the UK – and that, and tech support, is where the UK sales figures come from – and that lower sales figure, and the high costs, result in a low taxable profit, and low UK corporation sales compared to £2.5b in sales and huge margins.

Following so far?

Well, here’s the kicker:

Google Ireland, you’d figure, must be rolling in it, then. But Google Ireland makes a very small profit each year – just €24 million on sales of €12.5 billion in 2011. This is partly because of commission charges from the UK and elsewhere, but largely because Google Ireland makes large royalty payments to another Irish company, Google Ireland Holdings.

No low UK profit, and low Ireland profit.

On to the clever bit: under Irish law, unlike UK law, a company is not resident in Ireland just because it is incorporated there, it is resident where its central management is located. And you guessed it: Google Ireland Holdings Limited’s management is based in Bermuda.

As we laid out yesterday, the Bermuda company isn’t taxed as a subsidiary of a US parent company under US law, unless it chooses to move that money to the USA and use it to pay dividends to the US parent. Which Google doesn’t. Like many multinationals with this type of cash offshore, it’s waiting for the US rules to change, or for a loophole to present itself.

To sum up: revenue from the UK and elsewhere is earned by Google Ireland, meaning no significant profits for Google UK. Google Ireland doesn’t make substantive money, because it expenses royalties for the algorithm to a company that is liable for tax in Bermuda. Google Inc in the USA isn’t taxed on that profit either, unless it chooses to bring the money into the USA.

Told you it was breathtakingly simple. Hopefully, the guy or gal who came up with that was well paid.

Of course, they do pay the relevant local sales taxes and the relevant employment taxes wherever there employees are based. And of course, you could ask quite fairly why the UK would think its entitled to the tax from proprietary products developed and owned in the USA.



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Multinationals and Tax in the UK – Part 1

The past 6 months or so, it’s been hard to get through a week, in the media or socially, without someone bringing up multinational companies who “pay no tax” (I probably move in more boring social circles than you).

Most publicity has been aimed at Google, Amazon and Starbucks, although other tech-based multinational companies like Apple, eBay, PayPal and Facebook gained mentions.

One key thing to note is that the statement that they “pay no tax” is not true: those companies pay VAT, Employers NI and other operating taxes. They’re also not avoiding the payment of tax – they pay the amount of tax they’re required to pay under the law, and HMRC certainly aren’t challenging that. The correct term for what they’re accused of minimising is Corporation tax.

While its made out to be, it’s also not a nationalist issue. Similar structures or methods to those used by US multinationals are or have been used by Premier League football clubs, major government suppliers and well-known individuals with their private companies. FTSE-listed companies also make use of the rules with their operations in other countries, to the detriment of those countries tax revenues, and the gain of UK companies, tax revenue and shareholders (Associated British Foods operations in Zambia making the news here).

I’m going to cover over the coming days the three companies who have been targeted and explain the mechanisms they use – Google, Starbucks and Amazon.

I imagine the ultimate reaction will be “they should pay more anyway”, but today, I’m going to give you a bit of a primer on company tax, so at least you’ll know how ridiculous some of the statements are next time you read them.

What I’m not trying to suggest here is that these companies aren’t minimising their tax – they’re certainly doing that, and in not-too-complicated ways, and in ways that aren’t available to companies that aren’t multinational. But I’d at least rather see them tried in the court of public opinion for things they are doing.

“They Pay No Tax” is a fallacy
As I mentioned before, it isn’t the case that these companies are paying no tax. Tax in the UK is generated by PAYE tax, Self-assessment tax (for the self-employed or property owners), National Insurance Contributions (including 13.8% paid by the employer), Inheritance Tax, VAT, Stamp Duty and other levies including fuel, alcohol, cigarettes and the like.

Companies that trade in the UK incur VAT on their sales (and claim deductions on VAT paid, whether it’s in the European VAT system or the UK. In the case of Starbucks, they remit the best part of 15% of their sales in the UK to VAT. Now you can argue that VAT is a tax on the consumer if you like (and you should), but I can tell you that for retailers, VAT is just another quarterly bill that adds to their costs. You don’t buy a coffee priced at £2 plus VAT, you buy it for £2.40.

Employers National Insurance is now at a ridiculous level. You’ll see it usually on your payslip: 13.8% of every pound you earn, paid by the company, to HMRC. Thats for the privilege of employing you. It’s incredible that that, along with employee National Insurance and personal tax rates of 20/40/45% that people can sustain employment in this country (maybe that’s why they’re incentivised to move as much as they can offshore).

They pay these taxes regardless of whether they make any profit. They also have to collect these taxes, pay accountants to calculate them, and keep audit records, without any recompense from HMRC for doing so.

It may be valid to suggest that these companies don’t pay much or any Corporation tax – but they certainly remit plenty of tax. Yet, I’ve never seen one figure publicised by their attackers that list the VAT or NIC taxes paid.

Corporation Tax isn’t paid on “profits”
The second misnomer is when a figure is quoted as a year’s profit next to an amount paid in Corporation Tax as though the two figures are directly related. Never is “taxable profit” mentioned because, again, these companies are paying the correct amount on their taxable profits.

Corporation Tax is not paid on this year’s accounting profit, and its certainly not paid on “EBITDA” or Operating Profit. It’s one of a number of factors, but its not how it is calculated.

I won’t go into every detail, but the two figures that make accounting profit and taxable profit so diverse as it relates to these companies are:
Capital Allowances: all business in the UK are allowed to deduct (with upper annual limits) money spent on capital investment: the building of new stores, new warehouses, refurbishments, equipment and fittings. This usually bears little resemblance to the amount “depreciated” for accounting purposes. As you can imagine, the building of infrastructure in relatively new and growing companies like Amazon and Starbucks is huge, and may well exceed any annual profit in a given year.
Prior Year Losses: as is only reasonably fair, companies that make losses in one year (including through capital allowances like the above) can count those losses against the next year. (They don’t get a cheque for 20% in the year they make losses). Again, if you’re building or growing a company, your costs often exceed income in early years, and the capital spent only adds to that.

You can’t judge a company’s taxable profit by its book profit. That’s not how it’s calculated.

The aims of Corporation Tax
The main aims of Corporation tax when it was introduced were threefold.

One aim was to subject the profit and the capital gains of a company to a single tax (unlike individual’s taxes which might comprise several different types of tax. Nothing important there.

The next was to make a charge on companies for a benefit provided by society: limited liability. This is an significant privilege – the shareholders of a company are not subject to the debts of a company, unlike sole traders or partnerships.

The final was that Corporation tax was intended to ensure payments of dividends from companies were taxed at the source in the same way PAYE and bank interest taxes are deducted at the source. A company is taxed, and then the shareholder receives (in effect) a credit against that tax when calculating his dividend tax liabilities.

That last aim leads into something worth considering: those rules aside, why are companies taxed at all on their profits? Companies don’t use the NHS, they don’t accrue or collect a pension, companies don’t go to school and they don’t receive welfare benefits. Over £360 billion is spent annually on those areas. You could argue they benefit from good roads and streets, law and order and government operations, but those are minimal compared to the larger “social” spending areas.

What are companies ultimately? Their profits flow to their shareholders – pension funds, equity firms and individuals (with the usual leakage to executives).
Corporation Tax only brought in 9% of HMRC’s £469 billion in tax revenue in 2012-13. That compares with VAT of 21% and Personal-related taxes of 54%. (For what it’s worth, the other 16% were stamp duty, hydrocarbon taxes and tobacco and school taxes in the main). And of course, a large proportion of that was credited against personal tax dividends, or as dividends to parents companies.

US Corporate Tax rules
Most, if not all, of the (international) companies receiving bad publicity over the tax issue are US companies, or have US parent companies (which doesn’t mean that US companies are alone in the Corporation tax argument). They’re largely the “biggest” names involved in terms of brand recognition.

The US tax system, naturally, charges a US company tax on all the profit it earns in the USA. However, what they don’t do is tax their companies on profits made by an overseas subsidiary of a US corporation until it is paid back into the USA by way of a dividend. Most of these large, cash-rich multi-nationals choose to leave this money outside of the US – Apple has over £60 billion held offshore.

I mention this only to raise that there isn’t a complete diversion of tax from the UK to the US by these companies – the US isn’t gaining, in the main, at the UK’s expense.

Again, I’m not defending these companies against any accusations of minimising their tax. They’re doing that quite well – in fact, Google CEO Eric Schmidt was quoted as saying he was quite proud of it. Ad it’s up to you how you feel about these companies and their benefits or otherwise to e economy and markets.

Over the next few days though, I’m going to cover the interesting bit: the mechanisms each of the big three use to minimise their Corporation tax.

Van Hoog

Book Review: Blood & Retribution – Nick Van Hoogstraten

Nicholas van Hoogstraten is a self-made British businessman and real estate magnate. In addition to being known for his real estate and business empire, Van Hoogstraten is known for his controversial life story: in 1968, he was convicted and sent to prison for paying a gang to attack a business associate. In 2002, he was sentenced to 10 years for the manslaughter of a business rival; the verdict was overturned on appeal and he was subsequently released, but in 2005 he was ordered to pay the victim’s family £6 million in a civil case.

He has been estimated to be worth £500 million, although he claims his assets in the UK have all been placed in the names of his children. His assets in property and farming in Zimbabwe alone are estimated to be worth over £200 million.

The book “Blood and Retribution” by Jordan and Walsh is an incredible page-turner. It’s rare to find a book as open and detailed about an entrepreneur and his, say, shadier side. Van Hoogstraten cultivated a lot of his reputation not just within his dealings, but in his public pronouncements to the media.

The biography contains a number of stories of tenant intimidation (in order to vacate freehold premises and sell them on), and details of his court battles and stints in gaol.

I’m not sure the book has too many entrepreneurial tips in it, but it’s one hell of a story, and impossible to put down.

Grab it from Amazon:
Nicholas Van Hoogstraten: Blood and Retribution

aapl logo

Smartphone OS Market Mirroring Standard Mature Market

Most markets, as they mature, tend towards a makeup like this:
• Market leader, with 40%-50% market share.
• Strong but somewhat differentiated competitor, with 30-40%.
• A cost or quality-based differentiated competitor, with 10-30%.
• A number of niche or struggling competitors with low single digit market share.
The most visible example is something like the Cola market, but the sportswear market with Nike and Adidas has a similar platform.

The smartphone operating system market is starting to mirror that model in the USA, according to the latest numbers from comScore.

The iPhone 5 has boosted Apple’s “iOS” market share in the U.S., just behind the market leader, Google’s Android. Apple’s iOS operating system had a 39% market share in the U.S. at the end up April, up from 31% a year ago, and from 34% at the time of the iPhone 5′s release last September.

Android has flattened at a 52% market share, up from 51% a year ago.

Both Android and iOS are gaining users, taking the lion’s share of the continued growth of the smartphone market. Android added 9 million users in the U.S. since September, and Apple added 13 million.

Of Apple buyers in the April quarter, 31% were first-time smartphone owners, 38% current iOS users, and a suprising 20% were switching from an Android devices.

Windows Phone, meanwhile, isn’t going anywhere in the U.S., with a market share of 3%, despite the release of the Windows Phone 8 in October. It did grow its user numbers by 300,000 in the U.S., but those numbers are dwarfed by iOS and Android. Blackberry’s new phone hasn’t improved their numbers to April, sitting at around 6%.

U.S. smartphone penetration continues to grow, now at 58% according to comScore, from 46% a year ago. With this market reaching what looks like maturity levels, it might be hard to see growth in those numbers – indicating you’re unlikely to see large EPS growth from Apple without a new product line or genuine penetration in China in the near future.

The one thing that might reinvigorate the market would be the in-built obsolescence of these products: all four major market participants are devoting significant resources (and three of them have monstrous resources) to the next big thing.

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Permission Marketing: the New Interruption Marketing

The dominance of “interruption marketing” has been on a downward trend due the changes in mediums that we use to access information and entertainment. Interruption marketing is fundamentally the term for marketing that interrupts what you’re doing (TV, radio, newspaper, magazine, telesales, direct mail) in order to advertise to you.

Less revenue is coming from TV and newspaper ads, as people access information and entertainment via Internet, subscription video services (Lovefilm, Netflix) and social media. Of course it’s not dead yet: web content providers are finding aggressive ways to interrupt your browsing experience. You can’t blame them – its big business, and while interruption marketing has been fragmenting the past 10-15 years, consolidation is well under way, and targeted systems will lead to its Phoenix-like rising from the ashes.

What is ideally the opposite to interruption marketing is permission marketing. The theme, as the name suggests, is that marketers obtain permission before advancing to the next step in the purchasing process. For example, they ask permission to send email newsletters to prospective customers. It is mostly used by online marketers, notably email marketers and search marketers, as well as certain direct marketers who send a catalog in response to a request. The prospective customer has either given explicit permission for the marketer to send their promotional message (via an online email opt-in form) or implicit permission (like querying a search engine, which implies a request for information).

Understandably, marketers feel that this is a more efficient use of their resources because the offers are sent to people only if they are actually interested in the product. Marketing can theoretically be done on a one-to-one basis rather than using broad aggregated concepts like market segment or target market.

But cost considerations, the use of software, and a flawed application mean that it simply isn’t 1-2-1, and its no longer really permission marketing.

I like Gap, because I have no taste, and need it laid out for me on a seasonal basis. So much so i probably shop there 4-8 times a year. So stupidly one day, I give my email address (I forget what for, online or in-store). Given I shop there once a season, I’m unsure how they determined that the best way to keep me on their subscription list was to send 20 emails a month. (Is the answer ‘Because they can?’)

And that’s largely how the cycle of email permission marketing goes:
see something of interest, sign up* when either buying, reading content feed from twitter or to get a free download.
Overwhelming number of emails flood your inbox.
Unsubscribe.
(*sign up may include the now must-have ‘spam email account’).

See, here’s what we gave permission for: to hold our email address, on the basis that you’ll use it sparingly to send us something, or on the basis that we log in onsite, and you can see what we view and what we buy or leave.

What you have to realise is, unless you give us a big box that says: “Tick here if you’d like to be sent daily or twice daily emails that your provider blocks the pictures of, in the hope that I will get a bonus for increasing the database size, and that you may buy something, if you can possibly digest all of that material”, you didn’t get our permission to do that.

So the cuddly idea behind your permission marketing is lost.

Here’s my tip if you’re relying on permission marketing and not interruption marketing:
IF WE WANT IT, WE WILL FIND YOU. We found you before. We like control. We don’t like endless emails. See, there’s this fantastic thing called Google out, where, as soon as we figure we want something we’ve seen before, we’ll have a look on there if we don’t have the information to hand.

I know it’s hard to maintain a six figure salary if you’re not spamming people daily and sending <1% conversion shoppers to your company’s site, but give it a shot.

Philip-Green

Business Book Review: Top Man – Philip Green

“Top Man” is the biography of UK retail tycoon, Sir Philip Green.

Green is best known for the rapid nature of his rise to billionaire status, his ownership of a UK high street retail empire, and for his attempts at buying Marks & Spencer.

The book is a very well researched and well-written biography, with the standard history of Green’s childhood and youth background, and his experience as a rag trader in London. Green was one of a limited number of genuine retail entrepreneurs in the 60s and 70s, and his early ventures didn’t produce much in the way of financial success, with most ending in liquidation or receivership.

His turning point financially came with the acquisition of financially troubled Bonanza Jeans, where Green set about recovering all of the doubtful debts to the business after buying it. He rolled this operation into a number of takeovers and acquisitions that ended in him running the publicly quoted company, Amber Day. Green wasn’t suited to running a public company and that experience soon ended in tears – but how, he had real cash.

In time, his skill in focusing on buying and in cutting costs has allowed him to parlay that cash into successful acquisitions and transformations of brands like Bhs, Miss Selfridge and Topshop. His unfortunate experience with the City at Amber Day has meant he’s operated these business as private companies. Using adept financial engineering, he’s managed to maintain almost complete control of those businesses using bank debt backed by the property portfolio in a low interest rate era, and famously paid himself a dividend of £1.6b a three year period to 2006. Of course, those dividends went to Monaco, and were kept out of HMRC’s grasp.

Green has got a language style somewhat unique, particularly with staff and journalists:
‘I just thought you should know I tore your f&^%ing article out and put it under the cat’s arse where it belongs!’ He’s aggressive in his language style, in his cost cutting, in acquisition style, and in his generation of money.

The book spends a bit too much time on the M&S battle, but aside of that is terrific.

Grab it from Amazon:
Top Man: How Philip Green Built His High Street Empire

Tax Bill

HMRC’s Appalling Letters Hall of Fame

The letter in the featured image hit the news yesterday.  It was received by Florence Coke, owner of Mama Flo’s cafe in Gorton.

It will get a bit of media as people laugh it off as some sort of numerical mistake made by a either a bureaucrat or a computer in an overworked system. “No harm done” right?  She couldn’t pay a billion pounds anyway, so it was never going to do any real harm.

Wrong. Here’s what’s wrong with that letter and how it arrives in someone like Flo’s mail.

If HMRC’s system doesn’t register either your return, OR your payment, you’re going to get a letter like this. Most of the time, that’s because the return was late, or the payment hasn’t been made. Some of the time it’s because of some sort of error: reference number not picked up, payment not matching the return, something like that. Other times, the taxpayer might have no VAT owing and didn’t file a return.

Here is what happens next. HMRC send a letter like what you see here, which has two huge problems to a frightened taxpayer:
1) the amount is not based in any way on what the taxpayer owes. I have no idea how they arrive at it, but the ridiculousness of Flo’s letter is matched by many I’ve seen over the past few years. It isn’t based on a tax return, it isn’t based on anything to do with the business.
2) the language in that letter is appallingly threatening for what they have no evidence is the amount that is required to pay: “we can visit your premises in order to arrange for your assets to be sold by public auction.”

Other than giving Flo a temporary ulcer and costing her £37 to phone them on 0845 numbers, ultimately, it didn’t do her any damage due to the sheer ridiculousness of the number. (Actually, as a betting man, I’m willing to bet she doesn’t even owe the amount she’s hand written on the letter of £17,588 – someone get her a good accountant).

But I know people who have owed nothing or owed small amounts and been sent letters like this and paid amounts that they didn’t owe that have placed them in significant financial difficulty. Almost as badly, through fear of not being able to pay an incorrect amount, I know a business owner who put it off, only to have his assets signed over to HMRC. He ultimately filed for bankruptcy. I know another business owner who simply paid up the amount and closed his business, as it ate his capital up – he didn’t owe any of the £9000 they’d affixed to the top of a letter like this.

This letter isn’t as funny as it looks. HMRC don’t exactly have a series of helpful people lined up once they flick you on to Debt Management. The language in it is appalling, and takes no account of the fact that not everyone knows the nuances of what they read or how HMRC’s systems work. It’s a disgrace, and it’s been going on for some years now.