Knickers to tax

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A lot of organisations — unions, NGOs, journalists, others — have asked me questions about the tax gap of late and who seems not to be paying their fair share.

I mused on this, looked at the data I have and come up with a surprising example. It’s Marks & Spencer plc.

Here’s the relevant data:


For those who want more, it’s in a PDF, here.

The yellow line shows the headline tax rate for M&S — which is really rather comfortable. For 2003 to 2008 the headline tax rate in the UK was 30% and then in 2009 it was 28%. M&S hovers around that figure — and all very good it looks.

But underneath that comfortable marketing line from the profit and loss account is the much, much lower current tax line — and that’s the figure the company actually expects to pay. This is low: lower than that for Tesco, Sainsbury's and Morrisons, with whom it might be fairly compared in the FTSE 100,  and even that for Barclays Bank — who some consider  a tax avoider with its many subsidiaries in tax haven locations.

I ask the question in the PDF:

How come a UK High Street retailer that is supposedly committed to the UK has a lower current tax rate when compared to its pre-tax profits than a bank with hundreds of subsidiaries in tax havens? And a lower tax rate than another retailer, Tescos, that has attracted considerable attention for its tax affairs? Its rates are, in fact, overall lower than those of IKEA, which is opaque, private, and dominated by activity in tax havens according to at least some reports. It had tax charges of 13.1% in 2009 and 19.3% in 2008.

Some answers are clear. M&S has surprisingly profitable overseas operations — much more profitable than its UK ones. And they seem to be in low tax jurisdictions. The average rate of tax on these operations in 2009 was about 4.4%. What is more as M&S says:

Deferred tax liabilities are not provided in respect of undistributed profits of non-UK resident subsidiaries where (i) the Group is able to control the timing of distribution of such profits; and (ii) it is not probable that a taxable distribution will be made in the foreseeable future.

That’s worrying for its shareholders. As I note:

This means (when compared to the balance sheet ) that about 18% of the total reserves of Marks & Spencer are not now available to their shareholders for distribution as dividends because of M&S's low tax policy. This obviously gives rise to questions about the sustainability of the future income stream the company and the judgement of the management in allocating resources in this way.

But that’s not the whole story — which is hard to find in the accounts. As I also note:

Marks & Spencer will say that the most significant reason for the non-payment of tax is the allowances they are given for spending on capital equipment such as shop fittings, computers, and the like where they make them last a lot longer for accounting purposes than the tax system assumes likely, giving them up front tax relief and so reducing the overall rates of tax. The difficulty with this explanation for Marks & Spencer's is that other retailers, such as Tesco, Sainsbury's and Morrisons do not appear to be enjoying anything like the same relief. This is not to say that M&S are wrong, but it does not appear a complete explanation, any more than pension fund tax consequences are.

There’s nothing, I stress, in the slightest illegitimate about this: M&S don’t need to say more if they don’t want to, and I’m sure they’re finding entirely legal means of reducing their tax bill. But as I conclude:

When this [low tax rate] has happened so persistently and for so long there have to be reasons — and they have to be policy reasons. Based on what’s said in the accounts that policy appears to be that M & S have said “Knickers to Tax”, and they’re getting away with it.

Which is fine for them. But let’s put it another way: if M & S had paid tax at the UK headline rate from 2005 to 2009 (five years) then they would have paid £589 million more in current tax. If it had just paid the tax it declared on its profit and loss account it would have paid £492 million extra.

This needs putting in context: it apparently costs £162 million a year to provide school sport, or about £810 million over five years. M & S could have paid for 72% of that if it had paid the full rate of UK tax on its profits or 60% if it had just settled the total tax it provided on its profit and loss account.

And that is an issue for us all. Ministers might say:

As a Government we’re not interested in large hikes in business taxation.

But the people of this country would like to know we’re all in this together. And it’s still not clear to me that we are.

And that’s all I’m saying.

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