What if you were taxed like Starbucks?

Since it arrived in the UK in May 1998, Seattle-based Starbucks has been a huge success. Today, the group operates 735 cafés and employs thousands of baristas to serve millions of coffee-mad customers.

However, Starbucks is facing storms of protest, following reports that it has paid little corporation tax since it arrived on these shores and none at all since 2009.

Starbucks in hot water

Following a four-month investigation, news agency Reuters revealed that Starbucks has paid no UK corporation tax for the past three years. What's more, despite UK sales totalling £3 billion since 1998, the giant US corporation paid just £8.6 million in corporation tax in 14 years.

For example, Starbucks' UK sales reached £398 million last year, yet it paid zero corporation tax in 2011. On the other hand, Costa Coffee - owned by FTSE 100 member Whitbread - turned over £377 million and paid £15 million in corporation tax on this smaller sum.

Of course, tax campaigners have long argued that the UK's biggest businesses aren't paying their fair share. Companies heavily criticised for aggressive (yet legal) tax-minimising include online Goliaths such as Amazon, Facebook and Google. Being internet-based businesses, these companies find it easy to reduce or even wipe out their liability to the UK's corporate taxes.

Following widespread anger among taxpayers and the media, Starbucks' bosses responded with the following statement: "Starbucks is totally committed to the UK, which continues to be one of our most important markets. We will continue to pay our fair share of taxes to the letter of the law in the UK as we always have."

Nevertheless, MPs have demanded an inquiry into how Starbucks can generate huge sales and fat profit margins, yet avoid paying corporation tax.

How companies make profits disappear

How does Starbucks get away with avoiding paying tax on its considerable profits?

The simple answer is that it uses simple – and perfectly legal – accounting tricks to minimise its profits or even turn a substantial gain into a loss. In short, Starbucks' best 'bean counters' work in its finance department, rather than behind its counters.

Though taxpayers are furious over the news that yet another giant multinational easily games the UK tax system, it's worth remembering that companies are taxed on their profits and not their sales, while individuals are taxed on their incomes.

What this means is that firms can offset all kinds of expenses – property rents, salaries, debt interest and many more costs – against their income from sales. Only after these expenses are deducted can a figure for taxable profit be declared.

Thus, companies use a variety of lawful techniques to transfer costs into high-tax countries while moving profits to low-tax states. This popular method of redistributing costs and profits worldwide is usually referred to as 'transfer pricing'.

In Starbucks' case, its UK arm dramatically reduces its taxable profits in Britain by paying royalty and similar fees to other parts of the global group.

For example, Starbucks UK pays 6% of its yearly sales to its parent as a fee for using its brand, trademarks and intellectual property. This payment slashed Starbucks' 2011 taxable income by £26 million. This – together with interest paid on massive inter-company loans – helped push Starbucks to a near-£33 million loss and thus not have any profits to pay corporation tax on.

How low could your tax bill go?

Thanks to their teams of wily lawyers and accountants, the rule for corporations seems to be "the larger the business, the smaller its tax bill". But what would happen if individuals were taxed as companies are?

For instance, let's say that you could opt out of the PAYE (Pay As You Earn) tax system and cease paying income tax and National Insurance contributions. How low could your tax bill go?

Let's assume that you're earning £35,000 a year, which is a decent salary in almost all parts of the UK. As an employee being paid via PAYE, income tax and NICs would gobble up almost £8,668, leaving you with an after-tax income of £26,332. In other words, payroll taxes currently grab almost a quarter (24.8%) of this before-tax salary.

Now let's assume that you switch to a company-like system of taxation, whereby you pay corporation tax on your declared 'personal profit' each year.

For the sake of argument, let's assume that you can deduct monthly mortgage and car interest payments from your annual income. Together, these total £9,000, leaving you with a personal profit of £26,000. Applying the 'small profits' rate of corporation tax of 20%, your yearly tax bill would be £5,200.

In this simplest of examples, by getting similar tax breaks and rates to those companies enjoy, your tax bill would fall from £8,668 to £5,200. This two-fifths (40%) fall in your tax burden would leave you an extra £3,468 a year better off.

What's more, the more expenses you can deduct from your earnings, the lower your tax bill and the better off you would be.

If you then started introducing car insurance, utilities bills, petrol, student loan repayments and a host of other factors essential to your life and earnings, you could end up paying minimal taxes on big earnings too.

Mobile money enjoys tax loopholes

What can we as taxpayers do to tackle this and similar tax scandals? The answer is 'not much', other than complain to our elected representatives in Parliament. This is because as individuals, we live and work in the UK and, therefore, are 'sitting ducks' for rising tax burdens.

In contrast, companies – especially multinationals such as Starbucks – are free to locate and move as and where they wish. So, in order to keep hold of this 'mobile money' from corporations, the UK tax system has become more business-friendly to cater to footloose and flighty firms.

Then again, if you're angry at Starbucks' tax-dodging over here, then show your annoyance by boycotting its stores. Instead, grab your daily dose of caffeine at British businesses such as Costa Coffee, Caffè Nero or – even better – the independent, owner-managed coffee shops, cafés and bars on your high street.

Are you a taxpayer hammered by taxes and fed up with corporations taking your hard-earned cash without paying their fair share? If so, please let us have your views in the comments box below!