I note that Tim Worstall has written an article about UK Uncut, calling them blithering idiots for deciding to target Boots for alleged tax avoidance.
As I have made clear, I am not a spokesperson for UK Uncut, and have not been on any tax protest, but the idea that Worstall might suggest people are blithering idiots when he is so clearly wrong does seem worthy of comment, for a change.
The issue of Boots' tax seems to have come to public attention as a result of the work of the Guardian. Felicity Lawrence of that newspaper wrote on this issue on 11 December 2010.
In June 2008, after more than a century and a half in the UK, Boots moved out of the country to Switzerland. The British household name had been acquired, along with its parent company, Alliance Boots, in Europe's largest private equity deal in 2007, thanks to £9.3bn of borrowing from banks and other investors. The deal squeaked in with this enormous burden of debt just before the credit crunch brought such lending to a jolting halt. Private equity's gain turned out to be the UK revenue's loss.
Interest payments on the Alliance Boots debt in 2008 were so large they wiped out profit in the UK — and the tax that used to go with it. HMRC rules allowed the company to set interest payments on its debt against profits for tax purposes, a benefit to investors that has helped drive private equity deals.
Ten years ago the Boots group generally paid about one-third of its profits in UK tax. The Revenue could expect to see a tax charge around the £120-£150m mark each year, with over £100m of that coming from Boots the Chemist.
Then came the move to the low-tax Swiss canton of Zug. Alliance Boots GmbH is now registered at Zug's 94 Baarerstrasse, an address that is home to a post office. After huge interest payments, its worldwide profits last year were £475m. It is hard to see which parts of the company are now making what, but the cashflow statement for the year to March 2010 shows that just £14m was recorded as the tax charge on those profits — that is, just 3% of profits. John Ralfe, the former head of corporate finance at Boots, told us he calculated that, "the UK has lost about £100m a year in tax as a result".
Worstall says in contrast:
It isn’t the move to Switzerland which has reduced Boots’ corporation tax bill. Not, at least, in anything more than a very minor manner.
It’s the interest bill it’s paying which has reduced corporation tax paid.
The company was bought by loading it up with debt. The interest on that debt is therefore an operating cost of the company and so reduces taxable profits.
Well this is the first important point. Boots was bought by a non-UK private equity company. The debt incurred has been loaded onto Boots. But let's be clear: the basic principle of tax relief is that costs incurred in the course of a trade are tax deductible against the profit of the trade. Those incurred to put you in a position to trade are not.
What the Guardian, and what I presume in consequence UK Uncut are protesting about is the fact that the UK tax system is in this case appearing to be abused. The cost of acquiring Boots is not a cost of Boots undertaking its trade as Worstall suggests; it was the cost of a third party acquiring shares in Boots, which had nothing whatsoever to do with Boots actual trading operations. They were the costs of a capital transaction in another location. So the question being asked is why are they being subsidised by the UK taxpayer? It is completely appropriate in this circumstance to protest that a tax loss is arising at cost to the British taxpayer which seems wholly inappropriate, and is an unnecessary subsidy from the UK to a third party located elsewhere to acquire a British company. I think that there is a very obvious campaigning point that this should not be allowed and that as a result UK companies should be protected from such predatory behaviour. it is not the action of blithering idiots to protest at this abuse of UK Exchequer funds.
Worstall goes on:
Do also note that it’s not actually certain that such a manouvre has reduced total tax collected. Of course, yes, the debt has reduced taxable profits at Boots and thus the amount of tax that Boots pays. But the interest received by whoever does actually receive it is taxed at the level of the recipient. If it’s, just as an example, a higher rate taxpayer who holds one of the Boots bonds, then they will be paying 40% (possibly even 50%) on that interest received: a higher rate than the 28% corporation tax that Boots would have paid without the interest bill.
This is yet more obvious misinformation. I fully admit that I do not know where the interest paid on this loan is received. Nor, I suspect, does Tim Worstall. But the possibility does at least exist, and I'm only suggesting it's a possibility, that the payment is made to a bank in a location with a lower tax rate than the 28% or 30% that might have been offered by way of tax relief in the UK. If that was the case then a considerable tax avoidance opportunity would arise as a result of the arbitrage of the rates in question. That would, if true, represent a tax subsidy from the UK taxpayer and it is quite right for people to protest at the possibility, at the very least, of such arbitrage occurring. Again, to do so is not the action of a blithering idiot, it is the action of an astute observer noting that the UK Exchequer may well be losing out.
But perhaps the most absurd comment Worstall makes is this:
And whining that all the interest goes to foreigners doesn’t work either: what this means is that there’s some £billions (whatever the number is) of foreign capital being used to provide luvverly shops and pharmacies for Brits to enjoy: us getting the benefits of foreign capital is a good thing.
Again, this is completely and utterly untrue. That foreign capital was not used to invest in Boots. It was used to acquire Boots. That is something fundamentally different of course. Investment requires the creation of new assets generating a tangible rate of return. Buying Boots simply required the assignment of ownership rights. That is something fundamentally different. To put it another way, I suspect all or most of the current Boots shops and pharmacies were in existence before Boots was sold to a private equity operator. I imagine the net new investment from the private equity operator has been low, but I stand to be corrected. However, they're claiming tax relief on their purchase cost, and not on their new investment, and that is a fundamental breach in my opinion of the tenets of tax allowance for interest in the UK economy that should apply, even if present we let something else happen. So this is a valid campaigning point for a change in the law, again.
And as for that move to Switzerland, did it save tax? Point 1 is, unless it did it would not have happened. No one moves to Zug for any other reason. it is only a tax haven. Point 2 is that Boots is a pharmaceutical company with, no doubt, income arising from intangible assets. Switzerland will almost certainly reduce the overall rate of tax on these compared to the UK. Of course there was a tax motive in that switch in that case, I have no doubt about it at all. I can't see another reason for it.
I leave it entirely aside whether or not it is appropriate for UK Uncut to protest about this in whatever way they choose: I have made clear that I think civil protest is acceptable so long as it is non-violent and property is not damaged. But to say that someone is blithering idiot for opposing inappropriate tax relief within the UK tax system, which undermines the potential revenues due to the UK Exchequer is, I think quite extraordinary. Such relief is, after all, akin to government expenditure. isn't it amazing that right-wingers can somehow think that spending is fine if it is on tax relief, but terrible if it is actually spent on something of benefit? That they do so just simply reveals their ideological bankruptcy.
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Richard,
Firstly this:
“That foreign capital was not used to invest in Boots. It was used to acquire Boots. That is something fundamentally different of course. Investment requires the creation of new assets generating a tangible rate of return.”
Yes, I know that’s the definition you like but I’m afraid that it’s not the standard definition.
http://en.wikipedia.org/wiki/Investment
“Investment is putting money into something with the hope of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income (dividends), or appreciation (capital gains) of the value of the instrument.”
I’ll stick with the language as it is currently understood if you don’t mind.
Secondly, although I don’t actually use the phrase in that post I am of course pointing to the use of “thin capitalisation” as the source of the reduced corporation tax bill. Not the move to Switzerland, but the loading up with debt.
My source?
http://taxjustice.blogspot.com/2010/12/daily-mail-gets-stuck-into-thin.html
“The Mail looks at the case of Alliance Boots, which was bought up by a private equity firm in 2008 and shifted (at least its legal base) to a nondescript building, 94 Baarerstrasse in Zug, Switzerland. A company which had a tax bill of £89 million in the last year it was quoted on the stock exchange cut its tax bill to a tenth of that amount now – even though sales and trading profits have consistently grown. The trick it used was an abusive transfer pricing trick known as ‘thin capitalisation.’ It’s a horrible name, but the Mail explains it very simply, and very clearly.
As part of the takeover, Alliance Boots borrowed almost £9billion from various banks. That debt incurs interest, and interest payments can be offset against profits when calculating the company’s taxable income. A higher interest bill means lower profits — and less tax to pay.”
I’m using your own organisation as my source.
@Tim Worstall
That’s as lame as your original post
a) Your definition of investment is unrelated to tax – I sued a tax definition
b) Sure TJN can say thin capitalisation – which is widely acknowledged as tax abuse. But that’s avoidance which can legitimately be protested against – but you argue otherwise
You are, as usual, way out of your depth – and offered gratuitous abuse as a result aimed at those who clearly know a lot more than you
That was my point and you have proved it for me
Please don’t bother to comment again – my usual policy of blocking your comments precisely because of that abuse you promote will apply
“The debt incurred has been loaded onto Boots. But let’s be clear: the basic principle of tax relief is that costs incurred in the course of a trade are tax deductible against the profit of the trade. Those incurred to put you in a position to trade are not.”
But of course it is another basic principle that interest cost incurred by a company is allowable as a deduction against its profits. Are you suggesting Boots might be about to find itself charged with a botched attempt at tax evasion?
I guess this is not where you are going. After all, think of the impact it would have on all those SMEs fortunate enough to be able to secure debt finance.
@alastair
No – no hint of evasion
Nor am i saying tax relief for interest on real investment should not be allowed
But for buying the business? No, I say – not against profit of the business bought
Tim’s comment contained no abuse.
It weakens your arguments to cut off debate rather than to engage it.
@Richard Murphy
Respectfully, I think UK Uncut has it wrong on this issue.
The British treasury is far from a loser in this transaction. To see that, you should go back to the time of KKR and Stefano Pessina’s buyout and take-private of Boots. The eventual price take-out price was 30% higher than the closing price immediately before the consortium’s approach. This represents a massive windfall for the many British shareholders in Boots, and significant capital gains taxes for the treasury.
Of course, the KKR offer was predicated on a certain capital structure, including various tranches of senior, second-lien and subordinated mezzanine debt. It also made assumptions about the future tax expenses of the company and therefore about the treatment of interest on the acquisition debt.
If the interest had not been deductible, KKR’s offer would have been lower, simple, and so would have been the revenues from the capital gains tax on the Boots shares’ take-out. The treasury has received a massive upfront payment of future taxes. Somebody with an understanding of tax should explain this to UK Uncut.
Regarding the move to Switzerland, the facts are very straightforward: Boots was acquired by a consortium comprised of KKR and Stefano Pessina, the majority shareholder and chief executive of Alliance UniChem, a pan European wholesaler of pharmaceutical products. Following the acquisition, Boots merged with Alliance UniChem and the combined group’s headquarters were established at UniChem’s base in Switzerland. There is nothing artificial about that.
Richard,
So no laws have been broken by Boots?
Georges
@Georges
No – no one has, I hope, said so
Tax avoidance is not law breaking
It is an ethical issue
But things can be legal and unacceptable – as anyone with an awareness of what to is to be human knows
@Martin Audley
The blocking is because of the persistent abuse Tim publishes on his blog of a great many people and by a great many people using language and tone that is unacceptable to a great many people
@Million Dollar Babe
That logic is so warped it is absurd – and does not justify the use of UK tax reliefs to fund a foreign purchase of a UK company where the interest charge was not incurred in the course of the UK trade of the acquired company, in my opinion
“That foreign capital was not used to invest in Boots. It was used to acquire Boots. That is something fundamentally different of course. Investment requires the creation of new assets generating a tangible rate of return.”
So if I spend £500 to make asset x it is an investment.
However someone who pays me £500 to buy it is not investing.
This is precisely why Boots is such a bad case for UK Uncut to pick. Parliament has repeatedly legislated to the effect that interest on acquisition debt is tax decutible. UK Uncut is free to disagree with this aspect of the UK tax laws, but why should it express its disagreement by demonstrating against a law abiding company such as Boots?
I can already hear you say that whilst Boots has broken no law, its behavior (or that of its shareholders) is unethical. There are countless forms of actual tax avoidance in relation to which I would agree that there are many ethical probelms involve. But this in NOT the case with Boots.
The main beneficiaries of the Boots takeover have been (i) the (mainly British) public shareholders who were bought out at a massive premium, a few months before the equity markets crashed, (ii) the UK treasury who received billions in capital gains tax from the public shareholders, and (iii) the British customers of Boots who are receiving a far better service from the company under its new management (if that wer enot the case, why would Boots’ performance be so good in a challenging retail environment). The private shareholders have contributed billions of Dollars in cash and in kind to the company and have yet to see any return on their investments, which carries significant level of risk.
This is not the sign of unethical behavior to me, or to a great many people.
@Richard Murphy
I fail to see how this can be tax avoidance. The government have offered a deduction for interest incurred in certain circumstances and the taxpayer has accepted – pretty much the same as your oft used ISA example.
Therefore tax planning!
However, many believe this “concession” to be ill-advised: first raised by the Oxford University Centre for Business Taxation in 2006 and also by Osborne frequently during the 12 months leading up to his emergency budget.
@David
The transfer of a property right is not an investment – it is the sale of a property right
Investing requires the creation of new wealth
If the purchaser of the asset you make in turn uses it to create new wealth that is investment
If they merely get a dividend stream as a result they are not creating new wealth – they acquired a property right
The distinction is, I should think, glaringly obvious
@Million Dollar Babe
let us disagree – because we do
Boots has been used to offset interest simply because that is possible here – the debt could be anywhere – but it is not, it is placed here in the UK against a trade for which it was not incurred giving a UK tax subsidy to those who have placed the ownership of the asset in question outside the UK tax net
That is tax avoidance in my book
It isn’t in yours
So I say tomato and you say tomato – and I say you’re wrong
That’s freedom for you
And that freedom includes the right to protest on ethical issues – if done peaceably
Mr Murphy, your logic seems flawed to me.
If I was a Swiss investor who invested in a Swiss company that had 20% equity, 80% borrowing to open new pharmacy shops in the UK, that would be investment. But is I invested in a Swiss company geared on the same ratio that bought an existing UK pharamacy shops that would be not be investment. Where is the difference?
@Richard Murphy
If you buy shares in a company in the anticipation of dividends and capital growth then that is a little like savings but with risk. If you buy sufficient shares in a company to get a seat on a board, with a view to influencing how that company is run, then that is like an investment. OR do you think the two things are essentially the same?
@Richard Murphy
I am happy to agree to diagree. I also repect anyone’s right to protest peacefully.
But if there has been an instance of tax avoidance as you describe it, then the protests should be targeted at the real benficiaries. The planned protests in Boots’ premises are completely missing that point.
MM$bb
@DevonChap
I have explained the difference
And you clearly understand it but refuse to recognise it
@alastair
The same thing – why does scale change it?
So is there a difference if my Swiss company bought the business and assets of a UK pharmacy shop that was about to close down?
I honestly do not understand the difference. Both result in pharmacy shops whose owners are abroad (this profits exported).Tax policy should be comprehensible to the ordinary man and logically consistant otherwise it won’t have legitimacy with those who pay it. Your arguement isn’t.
If you want to get into the pharmacy business in the UK why should buying a ready made business which has all the assets you want be taxed differently, and have a different moral character, to buying those assets individually and assembling them (as you would if you set up a new shop)?
@DevonChap
Respectfully, I have made a simple and straightforward point – which is curiously completely consistent with much of the logic of tax – and I think there is nothing to add
If you don’t understand it then that is your problem,. not mine
The point I have made is completely comprehensible to those with open minds
From my own limited knowledge on the subject and the information that I have gathered from countless sources across the internet, I am of the exact same opinion as Richard’s.
It’s a very interesting and well thoguht out article, in my opinion, so thanks for sharing it.
Also, I’d like to add that the comment which includes this quote: “The point I have made is completely comprehensible to those with open minds” is almost spot on.
We would all benefit greatly if people could take some time out to do their own research on the matter rather than relying on the media and rash opinions.
It never ceases to amaze me that we have all become so ludicrously ignorant, despite living in an age when information is so readily available.
And so I return to the quote which I said was ‘almost’ spot on. Personally, I think we have gone far beyond the stage where the mind is required. If people only opened their eyes, the truth is becoming increasingly difficult to miss.
{Price of a moidest sized house in the suburbs}-Babe is close to the point but misses a bit. The Treasury is not fussed about this because whatever shows up in Boots’ tax bill, the overall situation doesn’t change much. Boots end up paying a lot of interest on borrowings, but the interest is taxable to the bank. Perhaps the bank is offshore, but has to get its funding from seomewhere, and ultimately the banking system has to absorb the billions of cash received by the former shareholders, which means the interest on that money earns interest which is taxable.
So in the long run very little changes, but the Treasury des get the benefit of taxes on capital gains and stamp duty and may see other long term benefits from restictions of loss carry forwards, which would increase future tax receipts.
@Alex
Ah, so I see – all those tax avoiding games are zero sum – how silly of me not top realise!
Why do they do them then?
Should we be sacking the management of all companies using offshore for wasting our resources? Is that the answer?
The use of tax relief on debt interest payments in order to reorganise the affairs of a corporation in a more tax efficient manner does not sit comfortably with its purpose (and the argument most people bring up in its defence) which is as an allowable operating expense of doing business alongside other business costs such as wages. Used in this way it is simply an abuse of the system, a tax on the ‘real’ economy, and a lot of people, including UK Uncut, understand this and it is surely right to raise it higher on the agenda of things that need sorting out in the wake of the credit crisis. It is no accident that most debt in the world (even excluding shareholder and depositor debt) is held by large global financial corporations, both private non-financial and financial, who exploit this ‘loophole’ using tax arbitrage between different tax territories. The continued abuse of this allowance is largely responsible for the runaway level of debt in the world and it needs to be curtailed if anything is really be done about reducing levels of instability and unsustainability. Surely it is time to address the tax deductability of interest payments on debt (well argued by Dirk Schoenmaker in the FT on December 30). To to answer the point about the reliance of SMEs etc on being able to borrow, why not just impose a maximum level of interest payment on debt, above which tax becomes payable? Surely it is right to protest at the abuse (and the abusers) of a system which perpetuates the concentration of wealth in the hands of the few at the expense of ordinary taxpayers (who in the UK, at least, cannot deduct their interest payments from their tax bills)?