The Starbucks scheme

[Incognito]

So let me see if I get this right. I create a company (company A) in some tax friendly haven with low rates of corporation tax, let's say Ireland (@12.5%).

I then create a trademark (Shabamm) and register that to company A.

I then create a Ltd company in the UK and call it Shabamm Ltd, licensing the use of the trademark from company A. I then work as normal through Shabamm Ltd, however the licensing fee comes out of gross profits before tax is calculated. Company A then pays the lower rate of tax on the licensing fee and I have now legally reduced my UK corporation tax.

Correct so far? I suppose the real fun part is how to extract the funds from company A without HMRC judging it as disguised remuneration.

[northernladuk]

Doesn't this fail a number of HMRC's definition of what Tax Avoidance is?

HM Revenue & Customs: Guidance from Anti-Avoidance Group

particularly...

Transactions or arrangements where the income, gains, expenditure or losses falling within the UK tax net are not proportionate to the economic activity taking place or the value added in the UK - especially where the transactions or arrangements are between associates within the same economic entity and would not have occurred between parties acting at arm's length and/or add no value to the economic entity as a whole. For example:
The transfer of ownership of an income stream from a UK resident company to an associated company resident in a low/no tax jurisdiction in circumstances where the economic activity giving rise to the income does not accompany the transfer of ownership and/or where no economic benefit accrues to the economic entity as a whole.

or/and maybe

Transactions or arrangements involving contrived, artificial, transitory, pre-ordained or commercially unnecessary steps or transactions. For example:

Transactions or arrangements exhibiting little or no business, commercial or non-tax driver. For example:

There might be others but I am not clever enough to understand them.....

[Jessica@WhiteFieldTax]

I suspect the difficulty is proving the value of your brand; Starbucks as a brand has value and proven income generation potential - that said, if its worth the royalties, it ought to be generating a profit - hence a never ending circle of virtueless.

[jamesbrown]

I suspect the difficulty is proving the value of your brand; Starbucks as a brand has value and proven income generation potential - that said, if its worth the royalties, it ought to be generating a profit - hence a never ending circle of virtueless.

Yes, much of this involves scale. Large, multinational, companies have many "legitimate" ways to move money around because their goods and services are supplied across borders. Multinationals can legitimately off-shore certain activities and reasonably argue a commercial basis, which is why it will be difficult to stop (without broader consequences).

[BlasterBates]

However anyone who understands the MacDonalds franchising model will know that independent companies (franchises) pay a fortune to MacDonalds for being a MacDonald's restaurant, ie. MacDonalds restaurants don't belong to MacDonalds, the owner dons a MacDonalds uniform and pays MacDonalds in the Cayman Islands for being able to "pretend" he's a MacDonakds restaurant. So unfortunately I think it doesn't matter whether you would outlaw the Starbucks model because Starbucks would switch to the MacDonald's franchising model, and the fact that independent businesses are prepared to handover most of their profits for use of the brandname means that indeed it is worh an awful lot.

[Alan @ BroomeAffinity]

The McDonalds franchise model is an interesting one: Typically you pay about £250k upfront and then you rent the property from them at 10% to 15% of the sales, then there's a 5% fee for the use of the system. On top of that you have to buy your stock from McD's. I'd guess that to be about 30%. Average net margin is around 6% which on £1.5m is £90k. Doesn't leave much after financing.

[Jessica@WhiteFieldTax]

Yes, MaccyDs do demand their pound of flesh, I suspect because its a blue chip product in terms of customer base, stability etc.

I'm a sad muppet, I've sat in a MaccDs watching the rolls, and tried to estimate the turnover. They don't half rake it in.

[sal626]

Its not just starbucks...most (if not all) oil companies do this as well.
But as Jessica said, its the (preceived) value of the brand that makes it work.

[Sockpuppet]

Plus starbucks have a few (hundred) million to spend on lawyers if HMRC ever contest it.

[Jessica@WhiteFieldTax]

Plus starbucks have a few (hundred) million to spend on lawyers if HMRC ever contest it.

Quite.

Either that or give Dave Hartnett a fully paid privilege card.