Amazon pays no UK corporation tax

The company attributes nearly all its income to its Luxembourg branch.

The Guardian has a major story today on the tax affairs of Amazon UK. The online retailer, Britain's biggest, pays no corporation tax in the UK, despite having between £2bn and £3bn sales here in 2010. The company avoids paying anything by registering the vast majority of its turnover in its Luxembourg office, which reported income of €7.5bn in 2010, despite having just 134 employees. The British office, which employed 2,265 people, reported a turnover of £147m.

The paper explains:

The UK operation avoids tax as the ownership of the main Amazon.co.uk business was transferred to a Luxembourg company in 2006. The UK business is now owned by Amazon EU Sarl and the UK operation is classed only as an "order fulfilment" business. All payments for books, DVDs and other goods go directly to Luxembourg. The UK business is simply a delivery organisation.

This arrangement saves them millions in tax:

At first glance, the corporation tax rates in Luxembourg and the UK are similar, but the Luxembourg authorities have a different view of costs that can be offset against income, which reduces taxable profit. So Amazon EU Sarl's €7.5bn of income in 2010 was almost entirely offset by €7.4bn of charges, enabling it to disclose a tax charge of just €5.5m. The charges are defined by the company as the "cost of product sales and other ongoing costs related to the operations of the company"…

This is in stark contrast to the performance of the UK fulfilment business which filed its 2011 accounts last month. For the first time since 2006, Amazon.co.uk Limited posted an after-tax profit of £1.2m, much better than the £3m after-tax loss reported a year earlier. The accounts show its turnover was £208m, a big improvement on the £147m recorded in 2010 but dwarfed by the £3.3bn of UK sales passed to Luxembourg.

The company still pays a fair amount of UK tax, because VAT is charged based on the location of the recipient, not the business. But a significant proportion of Amazon's sales are books, which are zero-rated for VAT; they also don't have to pay British sales tax on downloads, instead paying Luxembourgish rates. For ebooks, this is 3 per cent, rather than the 20 per cent they would be paying in the UK. Until last Sunday, the company also managed to not pay VAT on almost every sale under £18. It used a loophole, originally designed to protect flower sales, which allowed low-cost goods to be imported from the Channel Islands VAT-free.

Richard Murphy, the tax campaigning accountant, suggested how a revised tax code could more accurately assess the company's holdings:

First split the profit in three. One third is then allocated between the UK and Luxembourg based on where the sales really are. Well, all these sales are to UK customers so that ratio is 100% to the UK and 0% to Luxembourg. So that £125 divided by three = £41.66 million of profit allocated to the UK.

Then we split the next third on the basis of where the people are. That’s 2,265 here and 10 in Luxembourg. £41.66 million x 2,265/2,275 = £41.5 million to the UK and £166,000 to Luxembourg.

And then let’s do assets – admittedly the one I have had to guess. The guess is £100 million here and £5 million in Luxembourg so that is £41.66 million x 100/105 = £39.7 million of profit here and £1.96 million to Luxembourg.

Add it up and near enough £122.8 million of profit would be in the UK and £2.2 in Luxembourg. Instinctively that feels right of course - because that is exactly how the economics really are. Glaringly obviously, as Amazon’s accounts admit, the market is here in the UK, not in Luxembourg. But the game of abuse that is being played means that almost all the profit goes to Luxembourg on this one – and almost none to us.

Implementing such a change would be a massive undertaking, though, as well as being difficult to get through EU law. For now, the news is likely to remain just bad PR for Amazon.

The Amazon warehouse in Swansea, in the run-up to Christmas. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

0800 7318496