Starbucks took the "unprecedented" step on Thursday of pledging to pay pounds 20million corporation tax, even if it makes no profit - only for the move to appear to backfire and fuel the fiasco surrounding its UK operation.
In a bid to end the pressure on the coffee chain, the US giant dramatically broke off talks with HM Revenue & Customs (HMRC) to offer to "pay or pre-pay somewhere in the range of pounds 10m in each of the next two years". Starbucks has paid just pounds 8.5m corporation tax in 14 years, despite UK sales of pounds 3billion — a tax rate of less than 1%.
Kris Engskov, managing director of Starbucks UK, admitted that the payment plan was an "unprecedented commitment" and that he had not yet "shared" the idea with HMRC. While keeping its tax arrangements unchanged, Starbucks said it would "not claim deductions" it has been taking for royalties to its Amsterdam office, intercompany loans, capital allowances and coffee purchases.
Starbucks was "taking action to pay corporation tax by not taking those deductions any longer", he said, adding that the company had been shocked by the "emotional" reaction of its customers to the tax row. On Thursday night, however, tax experts described the company's payment proposals as "commercially gobsmacking", while politicians warned that the move underscored the view that the UK's tax system is being treated as a "complete joke". Even tax campaigners at UK Uncut dismissed the move as "just a desperate attempt to deflect public pressure".
Patrick Stevens, president of the Chartered Institute of Taxation, said: "If Starbucks is saying its current tax arrangements are all agreed with HMRC, then in commercial terms, it is making a gift to the government, not paying tax. It's gobsmacking really." He warned that the precedent could create a two-tier tax system in Britain. "Will we have a payment level of companies that sell to the public, particularly with younger customers, and then another level of tax for the rest? It's shown the flaws in the UK system."
Stephen Williams, treasury spokesman for the Liberal Democrats, said: "It is extraordinary. People have been joking that some of these multinationals seem to think that paying tax is voluntary. Well, Starbucks have just confirmed the joke really. Tax is something that is a legal obligation that you should pay. It's not a charitable donation in order to gain brand value."
A spokesman for HMRC said: "Corporation tax is not a voluntary tax. HMRC will challenge, through the courts if necessary, any structures or tax payments that do not comply with UK tax law."
Margaret Hodge, chairman of the public affairs committee, said Starbucks had taken a "first step in the right direction" and she hoped Google and Amazon would "follow suit".
Engskov maintained that Starbucks' low corporation tax payments had been because the company had "not been as successful over our 14 years in the UK". On Thursday night, he was confronted with Starbucks' accounts for 2011 that stated the UK was one of four key foreign markets upon which the company relies for a "significant portion of net revenue and earnings".
But Engskov told Sky's Jeff Randall: "We are not profitable in the UK". A company spokesman said the annual report "does not assert that the UK [business] was individually profitable".