Amazon Tax Bill

3rd August 2018

As we continue to enjoy the summer holiday season, the accounting world starts its countdown to the tax return deadline of 31st January.  This is the busiest time of year for accountants, so please remember to get your paperwork in as early as possible to help your accountant!  Here at The Curtis Partnership, accountants in Staffordshire, we have already completed around 200 tax returns.   

 Whilst taking a small breather from completing tax returns one news headline caught our eye this morning.

 “Amazon UK Tax payment falls to £1.7m”

 ‘Here we go’ we thought, this should be good reading….

 Unfortunately, the way in which this story has been reported is mis-leadingAnyone can access the accounts for Amazon on Companies House as the journalists have done which has lead to this reportThe report says that Amazons “Operating Profit” has risen to £80m but they have paid less tax than in the previous year when profits were £48m.  If you look at the accounts you will see these figures shown on page 9 which references note 3 in the notes to the accounts.  If you look lower down you will see there is interest receivable and then interest payable, which for some reason the journalists seem to believe does not form part of the tax calculation.  We can all agree that if we didn’t receive tax relief on interest payments of £7m, we’d all be a bit upset.  The actual starting position for any tax calculation is the ‘Profit on ordinary activities before taxation’ – £72m.  Ok, so who thinks we calculate the tax now?  If you think ‘yes’ this is unfortunately the wrong answer.

 Tax is payable on the TATP (Tax adjusted trading profit).  Included in the administration costs will be some items that need to be adjusted for such as depreciation.  For Amazon this is not a small sum (£128m). This is added back to the profits before calculating the tax.  That makes it worse I hear you say, well yes but……

 The next thing to be adjusted for is Capital Allowances.  This is the system of tax relief on new equipment and machinery purchased in the year.   In order to get a look at what happened here you need to move on to the Balance Sheet.  On page 10 you can see that the ‘Tangible assets’ (which includes equipment assets) increased by £800m.  Now we refer to note 9 to see if that gives us a clue as to what happened.  Asset additions for the year were £963m but there is no tax relief on buildings generally, so Plant, Office and Computer equipment amount to £273m.  Now the problem here is that although we say that there is no tax relief on buildings there is tax relief available of their fixtures and fittings and Amazon will have a whole team of people employed to get the maximum tax relief out of this.  If you have never made a claim on any buildings you have purchased then please speak to us and we can see if we can help.

 If we now look at the calculation so far, we have:

 Profit before tax                              £ 72m

Add back depreciation                   £ 128m

Leaves taxable amount                 £ 200m

Less capital allowances

£273m @ 18 %                                   £50m approximately

 This would leave taxable profits of £150m.  The tax rate shown is 19.25%.  This is because the Corporation Tax rate changed on 1st April 2017, half way through their accounting year.  Looking at the tax reconciliation the add back of nontaxable expenses is £5.7m which makes us believe that they managed to get another £250m of allowances out of the property or have managed to get tax relief from the assets under construction.  It’s hard to say as we don’t know the detail behind these figures, but that’s very good going.

 So current taxable profit               £ 150m

Less further capital allowances

£250m @ 18 %                                   £ 45m

New taxable amount                     £105m  if we tax this at 19.25% we get at tax figure of £20m

 To further reduce their taxable profit, Amazon have then given their employees shares in the Company (which we won’t go in to too much detail about here as it’s a complicated area) but basically this is a deductible expense attracting tax relief of £18m.  They have effectively given their staff a bonus of £90m which is pretty lucrative if you are an employee.  Having taken that off the £20m you are left with £2m tax to pay.  And that’s what they did.  They haven’t used any special rules or done anything risky.  All they did is follow that same tax system as your builder, plumber and electrician can use when they trade as a Limited Company.  Now that is just a very rough overview but you can see that the article painted a very different picture.

 Now you could argue that large Companies should pay lots of tax as they can afford it, but we’ll leave you with this thought.  With advances in technology, business is very “portable” now and can be run from anywhere.  Our tax rate is on a par with most of Europe who are our main competitors for business.  You also need to consider the staff they employ.  Not only does their employment put money back into our economy through them spending their wages here but it also puts tax and national insurance into our tax system.   Based on the accounts, we estimate £150m over the last year which funds the NHS and local schools.  Putting tax rates up for the big Companies could have a massive impact on our Country if the big Companies then moves their operations elsewhere.  Also, changes to Corporation Tax rates could affect every Limited Company in the UK, not just the big Companies.

 We hope you all enjoy the rest of the summer!!  It has been glorious.