The chief executive of Caffe Nero has defended his business’s tax affairs after the company’s annual accounts revealed that the coffee chain paid no corporation tax last year despite making profits of almost £40m.
Gerry Ford, Caffe Nero’s chairman and chief executive, denied that the retailer does not pay any tax.
“We always pay our taxes,” said Mr Ford, who has increased the size of the retailer from just five stores when he first became involved with Caffe Nero in 1997 to an international brand.
“In the last few years our operational profits have been wiped out by paying UK banks interest,” he said. “They, in turn, pay taxes on our money that they get.”
var tmg_ooyala_embded_tag = "http://player.ooyala.com/player.js?embedCode=A4dWMxNzqbXeUG5hbyHwrNKezWqgJCqh&width=460&height=258&deepLinkEmbedCode=A4dWMxNzqbXeUG5hbyHwrNKezWqgJCqh&video_pcode=RvbGU6Z74XE_a3bj4QwRGByhq9h2&playerBrandingId=7dfd98005dba40baacc82277f292e522&thruParam_tmgui[relatedVideo]=http%3A%2F%2Fcdn.api.ooyala.com%2Fv2%2Fassets%3Fwhere%3Dembed_code%2Bin%2B%2528%2527l5dTN2NjqEuQ7UPUGJUy_LfssR6Hhd_d%2527%252C%2527J1ZzA3NTpuWSdyU6i4jbX4B1dCcjUQ4y%2527%252C%2527t5OXU2NTpkOrj_yVqk5hsldnGuwlQbA1%2527%2529%26api_key%3DRvbGU6Z74XE_a3bj4QwRGByhq9h2.WFFAb%26expires%3D1640995199%26signature%3D6b%252F4A6c6j7oxTPLh%252BvU3VnLJ8xX17Xlo1FmHL0EsXsA"+"&thruParam_vast[tagUrl]=" + tmgAdsBuildAdTag("vid", "620x415", "adx", ";dcmt=text/xml;psz=460x315", 3); document.write(' ');
Sources also pointed to the payroll taxes paid on the retailer’s near-4,000 staff and the business rates paid on its UK premises.
The 480-shop retailer, which was founded in London in 1990 and is owned by private equity backers, paid no corporation tax in the year ending May 31 as a result of the debt it is carrying and its complicated ownership structure.
Following a series of revelations about foreign companies paying little or no tax, the issue has climbed up the political agenda and led Vince Cable, the Business Secretary, to demand that the Chancellor “get to grips” with the issue in the Autumn Statement. But Mr Ford’s arguments show how complicated the issue is.
Last week, the heads of retailers John Lewis and Dixons said British companies faced being driven off the high street by rivals which did not directly fund the UK Exchequer.
Although the vast majority of Caffe Nero’s business is conducted in the UK, its parent company is based in the Isle of Man (Other OTC: MAGOF.PK - news) for tax purposes. Despite its geographical proximity to the UK, the standard rate of “corporate income tax” is 0pc on the island.
There is no suggestion Caffe Nero is operating outside HM Revenue and Customs rules or guidelines, rather it is simply taking advantage of the rules in place in relation to capital allowances, deferred losses and interest payments.
Caffe Nero is 60pc-owned by Mr Ford, through his Saratoga holding company, which is domiciled in the Isle of Man. The remaining 30pc of the equity is owned by Paladin Partners, with management holding the remaining 10pc of the shares. Paladin (HKSE: 0495.HK - news) is also registered in the Isle of Man.
Caffe Nero accounts just filed at Companies House show that Caffe Nero’s owner, which is called Rome Pikco, generated profits before tax of £39.9m in the 12-month period on sales of £185.2m.
Although the retailer has branches in Turkey and the United Arab Emirates, and shops through a joint venture in Poland, the accounts state that 99.6pc of sales or £184.56m in the past financial year were generated in the UK.
However, Rome Pikco did not pay any corporation tax, because of the interest it is paying due to its debt structure. The accounts say it is the first year Rome Pikco has made a pre-tax profit, on which corporation tax would become payable.
Rome Pikco was created as a holding vehicle in early 2007 after Mr Ford led a buy-out of Caffe Nero for £225m. It had previously been listed on the London Stock Exchange.
In each of the previous years from May 2007 to May 2011 Rome Pikco has made a pre-tax loss.
The accounts show that at the end of May, Rome Pikco had £375.7m of gross debt, including a £179.1m fixed rate loan from its parent company.
In addition, the firm’s debts include bank loans of almost £100m, a mezzanine loan part debt, part equity of £50m and £49m of “payment in kind” (PIK) notes. These are issued by the company, usually to shareholders, and usually carry a high rate of interest.
In the accounts, the company confirms that as a result of the reduction in interest rates on shareholder loans thought to include the PIK notes a £62.6m credit was transferred to the May 2012 profit and loss account.
Due to the amount of debt, Rome Pikco spent £37.9m in interest and financing costs.