Case studies in low UK taxes: from lattes to water pipes Corporations appearing to not pay their fair share of tax in the UK is a running theme. Starbucks, Google, Amazon, and now water companies, are all having their turn in the limelight. Let's have a brief tour around each. Firstly, sorry to be the bearer of bad news - but it turns out that you aren't paying enough for your extra hot single-shot caramel skinny latte (as per a Starbucks press release, emphasis ours): The truth of the matter is, the one tax that has been debated in the media, corporation tax, is based on the profits we make in this country - and regrettably we are not yet as profitable as we'd like to be. Also, when it comes to items other than corporation tax, the company had this to say: The most important thing to understand is that Starbucks does pay tax in the UK. Indeed over the last three years we have paid over £160 million in various taxes including National Insurance contribution for our 8,500 UK employees, and business rates. Okaaaay - kudos and an after-coffee mint to Starbucks for having the guts to leave the comments section underneath the release open. There's some caffeinated rage to be found in there. As for businesses such as Google and Amazon, the FT pointed out the following on Sunday: Tricky. Speaking of which, the idea of lumping water companies into the same bracket as the others - it was already a stretch naming Amazon and Starbucks in the same breath! Clears throat So, UK water companies are regulated by Ofwat, which sets price caps every five years, the last set being valid from 2010 to 2015. Here's what they say about what is being balanced when setting them: In short, they want the companies to invest in infrastructure, to be able to raise funds at a reasonable rate from financial markets by offering a commensurate return to investors (yes, we refer to the dividends many find unpalatable), and do that without ripping customers" faces off with unaffordable bills. That doesn't sound nearly exciting enough though, does it? Over to the Guardian, as reported on Saturday: Three of Britain's biggest water companies paid little or no tax on their profits last year while generously rewarding their executives and investors, the Observer can reveal. Thames Water and Anglian Water paid no corporation tax on the profits made from their utility businesses while Yorkshire Water kept its payments to the Revenue in the low millions. We're going to pick on Yorkshire Water, for no particular reason. OK, if you twist our arm, it's partly because it's funny that they scanned in their financial results for the last year rather than having a proper pdf, which is, frankly adorable. Starting point is corporation tax in the low millions, as per Observer/Guardian. Let's look at the tax reconciliation in the accounts: So, the company made losses in some of their group companies, had some adjustments to make, etc. End result being a large tax credit. Summarised: There's an important general point we want to bring up here - namely that water companies invest in huge amounts of infrastructure. All that "replacing London's Victorian water mains" stuff, for example. That is going to mean lots of investments in long-life assets. This is exactly the type of investment that comes with various tax breaks. In short, the government wants to incentivise these companies to invest, so it does so through the tax line. A-hem: The recent stories regarding all of this have something of a whiff of misunderstanding about the difference between tax accounts (to calculate a tax bill) and financial reporting. To see what the tax liability will be over time, look at the financial reports. If you don't like what you see in the tax accounts, then sure, argue for a change in legislation. But taking a shortcut to the cash flow statement in the financial reports doesn't quite cut it. Tell us exactly why you don't like the end number. Cash flow statement for Yorkshire Water, for context: If one is still not pleased with the water companies, perhaps maybe also a change in the way they are regulated by Ofwat, e.g. where the price caps are set if one thinks investors are getting too good a deal and customers not a good enough deal. Back over to the Guardian: Yorkshire Water, which made an operating profit of £303m in 2012, paid £2.9m in tax on its water profits last year and £11.1m in the year before, having increased the debt on its books recently, which offsets tax payments. Raising debt, you say? Well, maybe the funds raised can be used for fat cat salaries. Also it can be used to build things. Dunno. Guardian again: Hughes [deputy leader of the Liberal Democrats] has written to MPs on the public accounts committee (PAC) investigating tax avoidance. MPs from the PAC have summoned executives from Starbucks, Google and Amazon to account for their tax affairs at a hearing in the House of Commons tomorrow. Hughes wrote: "Yorkshire Water for example has seen its tax liability decline from £70m in 2009 to a tax credit of £18.9m this year after it took out £1bn from a group of finance companies it owns in the Cayman Islands. I believe that this issue raises a few questions which the PAC and the National Audit Office could fruitfully pursue.  That could be interesting. Our best guess, skimming the accounts and as per the above, is that the effect was seen in the "Utilisation of tax losses in other group companies" line from the first table, that increased from £19.7m to £39.5m. There were other line items that went down as well... As for what the water companies themselves had to say: A Thames spokesman said: "With nearly £1bn of deferred tax liability on our balance sheet, tax is being delayed, not avoided. We are structured in an efficient way in accordance with the tax system and the benefits from this flow through to Thames Water customers - in the form of £1bn a year of essential investment while keeping bills among the lowest in the sector. All of the Thames Water group's active companies are resident in the UK and pay tax to HMRC. A spokesman for Anglian Water said: "Tax is low because of the very significant capital investment that we are making (£2.3bn between 2010 and 2015). Under the UK's tax regime, we are entitled to capital allowances on this investment as an incentive to invest early. However, tax payable is only deferred, so looking at our future tax liability you can see that we will in time pay the tax in full. There is no tax avoidance here whatsoever. The intra-group loan system has no bearing on our tax liabilities. Of course, they are going to say that. But they may have a point too. And if you don't like it, sure, as we've said, argue for changes in the tax legislation and in the way they are regulated by Ofwat. Next up, we want a Office of Coffee Services, "Ofcof." Our extra hot single-shot caramel skinny lattes are too expensive. Related links: Water companies pay little or no tax on huge profits - Guardian Water companies under fire on tax - FT MPs to grill companies over tax strategy - FT