I have been sent an email issued by Caffe Nero to a concerned commentator regarding their tax affairs. Caffe Nero said:
Over the last few years, we have worked hard to create our business and are proud of generating over 4000 jobs. The figure quoted in the media regarding our profit is before we pay the interest on debt owed to British banks. In 2007 we took on significant debt in order to take the company private (off of the London Stock Exchange) and also to fund the growth and job creation in this country. The level of interest we have to pay off to our banks as a result of that debt is substantial and after paying this we have no profit left on which to pay Corporation Tax.
This needs a little debunking, using as a reference point my analysis of their tax affairs, available here.
First of all, no one disputes that Caffe Nero have done a good job of creating a profitable business in the UK: they very obviously have. In 2013 that business made a profit of £21 million on sales of £204 million. They are to be congratulated on that achievement, but let me, or rather, former White House financial reform adviser Elizabeth Warren, put that in context:
“You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory – and hire someone to protect against this – because of the work the rest of us did. “Now look, you built a factory and it turned into something terrific, or a great idea. God bless – keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”
Substitute coffee shop for factory and you get my point: Caffe Nero has to celebrate its achievement by honouring the social contract. And let me, for the sake of those in doubt, make clear that honouring the social contract is not the same as complying with the letter of the law, however it may be interpreted by technical advisers. If it was we would not need the term ' social contract'.
So, having debunked this point, let's then consider the other claims Caffe Nero makes. First it says 'The figure quoted in the media regarding our profit is before we pay the interest on debt owed to British banks'. This claim is simply not true: the figure of £21 million quoted in the press is the profit reported in the accounts of Caffe Nero Group Limited. There is no interest charge in those accounts: that charge is included in other accounts of the various parent companies that own Caffe Nero before sight of its activities is lost in parent companies in Luxembourg and the Isle of Man. In other words, figures quoted in the press are precise, accurate, and appropriate.
Second, as I have noted in the report I have prepared, interest paid to third parties (which may, or may not, include British banks) does indeed turn the group's profits into losses, but that is not all the interest paid. Almost half the UK group's debt is owed to parent companies outside the UK and more than £12 million of interest was due to them in 2013. It is misleading to suggest that all debt is owing to UK banks: first the accounts do not make clear who third party debt is due to and secondly it is very obviously not true.
But, there is also a third point, and the question in that case is why this is permitted. This is a question of equity. If I decided to buy some shares in a coffee shop chain I would not get tax relief on the interest paid on money borrowed to do so, and I think that's right. But if I instead acquired the whole chain I would get that relief. Now, I know, it's also true that loans to acquire stakes in small businesses also attract tax relief, so I won't mislead on that point (but I happen to think that relief appropriate to overcome the disadvantage small business suffers when it comes to raising equity capital because it cannot access stock exchanges), but in Caffe Nero's case this was the acquisition of a quoted company that we are talking about. In that situation firstly, the private equity group acquiring the quoted company had an unfair advantage over private investors because it could get tax relief on its borrowing to acquire shares and they could not - meaning that the Caffe Nero acquirers had a lower cost of capital as a result and so could afford to pay more for the company than others would, and second, Caffe Nero clearly did not need that funding for its business: it was already quoted on the stock exchange so had access to the capital it needed already. In other words, there was no social need for this relief to be given. In that case I argue that loading the company with debt may have been legal, but still exploited tax loopholes that I very strongly suspect were never intended to be used in this way when first granted. Call that tax avoidance if you like.
And then let's deal with the point Caffe Nero fails to mention, which is the offshore aspect of this. It has not sought to explain the use of Luxembourg or Isle of Man holding companies, or offer their accounts. If you're trying to be transparent Caffe Nero that's called an outright fail. You cannot say you're paying the right amount of tax when you're hiding your affairs from view. That's just not possible.
So yes, it's true that you have no profit left on which to pay corporation tax, but it's how you get to that point that troubles us.
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Ed note: This comment has been deleted as it made factually inaccurate and misleaading statements
This is possibly your clearest exposition of what’s wrong with the way we currently tax large, multi-company, groups.
If something is legal, at present, then its acceptable. Whilst many legal things aren’t necessary liked its the law.
The founder of te company repurchased his company this wasn’t a stranger to the company. He must of had a significant reason to take the risk of buying back the company, one presumes this was because he wanted to create long term jobs.
At present he has done nothing wrong.
“If something is legal, at present, then its acceptable. ”
So they said of slavery
And apartheid
Get real
Excellent piece and hopefully this will make things clearer to the neo liberals. I loved the comment from Elizabeth Warren; can I steal it please? There are some people I need to educate!
It’s in the public domain!
Hello Richard
I see you nail your colours very firmly to the mast here:
“And let me, for the sake of those in doubt, make clear that honouring the social contract is not the same as complying with the letter of the law, however it may be interpreted by technical advisers”
The “Social Contract” and the “Spirit of the Law” seems to me to be one and the same, maybe I’m wrong. However, I’m afraid you leave me still in doubt; where does one look for the Spirit of the Law beyond the Letter of the Law? Is there an arbiter of this spirit/social contract, other than Elizabeth Warren of course?
That there is a spirit of the law was clearly recognised in the General Anti-Abuse Rule guidance notes written by many of the great and good in the tax profession, and me.
I think to argue it does not exist is now just futile rhetoric and that is very boring
Well, I didn’t argue it didn’t exist; a classic straw man. I will argue that the GAAR does not do what you say. It simply can’t because it works like all tax provisions: it either applies to an arrangement or it doesn’t; i.e. the Letter of the Law.
This is a somewhat backward conversation because I am a good citizen who seeks to go beyond the simple Letter of the Law; so I suppose I’m always seeking the Spirit and the Social Contract. However, I am very cautious about the standards to which I hold others.
So I ask again, where do I find this ‘Spirit’, what authority?
I have answered the question
So, the guidance notes to the GAAR is it then, the sum total of your cited authority.
And, assuming of course that the GAAR hasn’t been invoked for their arrangements, the directors of Caffe Nero can take pleasure in knowing that you feel they are indeed acting within the Spirit of the Law?
A rather surprising outcome to this post!
If you asked me to cite an authority for the sun coming up tomorrow I would have a problem
When the spirit of the law is so widely recognised to exist I think you can find your own evidence
Again you’ve missed what I said, I do think there is a ‘Spirit of the Law’ and try to find it for myself. However, if I’m going to claim the right to point the finger at others, to add an extra layer on to others’ obligations and require them to honour a ‘social contract’, then there should, shouldn’t there, be some reference point, some authority, other than my own opinion. This is particularly so if I don’t have access to all the facts, which you don’t here. Because if there is nothing more to this ‘social contract’ other than Richard Murphy’s personal dislike of corporate businesses then where are we?
Please just search this site
I refer to it many times
You could also use Google
Or you could simply refer to an authority, to which you could also refer any person, partnership or body corporate that is seeking to be a good citizen and honour its social contract. It should be very simple for you; your reluctence is causing me to wonder though.
I know of no one authority
I quote many
And the fact that it us inherent in the Ramsay principle, the GAAR and so much more surely makes that clear?
But do the workers in that factory not pay tax? Or the tradespeople and builders who built it and fitted it out? And possibly business rates? Surely they have to be factored in and weighed against the lack of taxes on profits?? I suspect politicians salivate over investment that creates jobs.
And are we not comparing apples with pears? Private investors usually do not carry on a business any more than employees can usually claim a portion of their household expenses. Different rules apply.
If we were to adjudicate the permisibility or amount of allowable tax deductions by the yardstick of social need (with the attendant difficulties of definitions, scale and so on) I think we are starting to give up on a national tax system and maybe even any idea of certainty in tax affairs. For instance, you could extend it to argue personal tax allowances had to be linked to local wages or costs of living.
I hate to say it Iain but the poverty of your thinking never ceases to surprise me
Anyone linked to tax as you are who makes your first argument fails at the very least to understand the politics of tax where there is simply no trade off to be made – just as individuals cannot make that trade off
Your second point makes no sense
Your third shows a complete lack if understanding of tax expenditure
I quietly despair
Well I suppose I should be glad I can still surprise you, although despairing on a popular and public blog hardly strikes me as quiet!
I suggested that it is appropriate at a macro economic approach to tax and spending to consider the total footprint of a business. This does not preclude looking at the lack of any direct taxes, or concluding the lack outweighs any other impacts. It merely suggests examining all the activity.
It was your post that contrasted the position of the private investor with the private equity group. If you believe the tax laws should treat private individuals in a similar way would we need to harmonise all the tax treatment?
I thought it self evident that, in the real world, tax relief for interest deductions has the same effect as personal allowances for individuals in arriving at tax payable . And equally self evident is the view that social need is hardly likely to be identical across all taxpayers or business scenarios. If you want to introduce the concept of limiting the deductibility of expenditure for tax purposes by reference to an undefined “social need” then the same test should surely apply to other tax reliefs and allowances.
The comments on this blog are relatively quiet – few read them compared t the articles themselves – maybe 10%
As for your points: no the whole footprint is not an appropriate measure. It’s like saying we’ll ignore a murderer because 95% of the time they killed no one
Your second point relates to horizontal equity: it is a concept I presumed you were familiar with
As for your last point, I simply consider it bizarre. First, I am not sure why a corporation is due a personal allowance. And second social need is not, of course, consistent. That is why we already have targeted allowances (age allowances, for example) and progressive rates. Unfortunately we also have far too many allowances for the wealthy. Perhaps you have not noticed that; it seems not.
Lastly you ignore the evidence of the distortions interest relief has created – which is why it is on the BEPS agenda. No personal allowance is. Maybe there is a reason
No, the Ramsey principle has been found at tribunals and Court to apply to some arrangements and not to others and the guidance on the GAAR is exactly that: a guide to the GAAR; nothing more or less. And they are in any case, by definition, the Letter of the Law. If neither of these is found to apply to an arrangement, by the test you’ve laid out here it is within the Spirit of the Law.
Regarding authority, you say “I quote many” but over the course of the day you have failed to quote any source or authority for an extra-statutory obligation to which one can hold others. Yet that is precisely what you are attempting to do with this post and many others.
There are none so blind as those who refuse to see
You clearly are
OK, so maybe you are reduced to raew abuse, that isn’t a pronlem for me.
I thought I would add a final note on Iain’s comments. By arguing that a businesses tax obligations should be looked at in the round – including the employment it creates etc – he is in fact arguing that it has possibly fulfilled its social contract. In other words he is on arguing on the basis of the Spirit of the Law. It’s certainly not an interpretation you would share; nor me for that matter. It does, however, show the difficulties in invoking a concept thatis so open to personal interpretation. A blogger I follow once said “morality is subjective, or it isn’t morality”, is he right?
If you can find raw abuse, then so can I
And if you think excusing corporate tax abuse because employees pay tax can be argued by anyone to be within the spirit of the law let me offer you an opinion : you are very seriously mistaken
A natural end to this conversation, wouldn’t you agree?
I never invited it
“‘ social contract’.”
But isn’t that the problem Mr. M. What you define as a necessary part of the social contract may be something I think is an utter waste of space. Bit like sprit of the law – I asked a ‘legal’ friend of mine about that – she’s much cleverer than me – and she just basically smiled and said ‘no, that’s why we have case law and judges and appeals…’.
I’m not sure if she is right or you are, but it is a very interesting argument, the problem as I see it though, is that my ‘spirit of the law’ might be different to what you mean by spirit of the law’.
If you put three lawyers in a room you can always get four opinions – and maybe more to suit what the client wants to hear
In this case you have missed the precise point – without a spirit to the law we would not need judges and appeals to find it