Before we begin let me make a few statements:
- Firstly, I love the Guardian. Its style, commentators and quality of journalism are nearly unsurpassed in the UK’s daily newsprint media. Only the FT is better in my opinion;
- Secondly, I cannot abide the misuse of statistics or data, whether unintentional, through ignorance, or intentionally through malice;
- Lastly, I have no time for the Conservative Party, nor any political party, and am always dubious of political donations, whether from company or union.
On Tuesday the fifth of June, 2012 The Guardian published a piece on page 7 about Lycamobile and their donation to the Conservative party. This was written by Rajeev Syal and Solomon Hughes.
In it they referred to the donations of “more than £300,000 over the last nine months”. I cannot and do not disagree with this data, as I have no independent way to verify it; the data is purported to come from the electoral commission. However the first line of the article stated that the company “has paid no corporation tax for three years”. It then later in the article states that the company “did not pay any tax between 2008 and 2010, despite generating a turnover of between £47m and £88m”. Before I start any analysis just a basic understanding of the way company accounting works suggests that this is in fact two financial years, 2008-2009 and 2009-2010 (their financial year runs from 1st March to 28th February the following year; so this is not actually ‘three years’. Also, confusingly, why is there such a variance in the revenue figures of £47m and £88m – that’s quite an error margin!
Corporate Taxation 101
Now let us start with some basics for those not initiated in corporate taxation; if you are then please skip this paragraph. Revenue is the money the company earns due to its principal business activities. Then a company has costs, or outgoings. These costs are paid for from the revenue or from savings (capital carried over from previous years or other investments, such as share capital or loans). If the costs cannot be met by revenue or savings and investments then the company is insolvent and can be declared bankrupt. If the outgoings are less than the revenue then the difference is called a profit (the opposite case is called a loss). These profits are subject in most countries to some form of taxation on profits. In the UK this is called Corporation Tax (or CT). If a loss is made then no tax is due. Losses can be carried over to subsequent years when profits are made to balance them out. This is logical, otherwise a company gets taxed on the upside, when it is profitable, but has no help on the downside.
The Guardian’s analysis
Now let us go back to the Guardian’s first sentence: “A mobile phone company that has paid no corporation tax for three years”. Can you see where this may be going yet? So having checked the published company accounts from Companies House I can clarify this misstatement as containing a number of errors:
- The figures are in fact for two financial years: 2008-2009 and 2009-2010 (24 months), as I suspected. Reporting this as “for three years” is factually incorrect and either professionally negligent or deliberately misleading.
- The revenue figures quoted are £47m for 2008-2009 (actually £47.9m, conventionally rounded to £48m) and £83.9m (not £88m) for 2009-2010 respectively. To report this as “between £47m and £88m” is semantically incorrect as well as professionally incompetent.
- The company made a loss in both 2008-2009 (-£10.9m) and 2009-2010 (-£8.3m). Therefore no UK Corporation Tax should be due on earnings in these years. However £8,465 was paid in CT in 2008-2009, possibly due to its minimal profits carried over from the previous year of £40,863. Therefore the statement “paid no corporation tax” is also untrue and either professionally negligent or deliberately misleading.
Interestingly the company did make a profit in 2010-2011 of £4.6m from revenues of £116.8m. And paid no Corporation Tax! This is because it was able to completely legally offset this profit against its loss of £8.3m the previous financial year. Some of those with a socialist leaning may not like this ability to offset losses against profits, but it has been around for a long time. I am surprised the Guardian didn’t lead with the more sensational, but at least factually correct, headline that ‘the company made £249m in revenue over three years (correct as 2008-2011) and has paid minimal corporation tax‘(£8,465). In reality across four years it has made a £14.6m loss and has paid 8,465 Corporation Tax on that, which seems pretty fair. Even if it hadn’t made its enormous political donations of £300,000 to the Conservative Party, alleged by the Guardian, this would not have reduced those losses.
The Company’s market
It could be implied from the article that the company should somehow be more profitable; to the innumerate that this could all appear to be some elaborate tax-dodge. However Lycamobile, which started in late 2006, operates as what is called a ‘virtual network mobile operator’; that is it has no physical mobile telephony infrastructure itself, only usually having the billing platforms that are traditionally associated with the real mobile provider (of which we only have 4 now in the UK). Frequently the virtual network operator is supplied all the necessary IT and network infrastructure by the actual network services provider company, who ‘white-labels’ its service to them. Virgin Mobile is a well-known operator in this market place. This type of company makes an extremely low profit margin as it is typically taking a few pence per transaction and relies on huge volumes to drive revenues sufficient to overcome its fixed costs and therefore make a passable operating profit.
History repeating itself?
Sadly for verity, the Guardian has form with this type of financial legerdemain. On Saturday the 18th of February 2011 the Guardian published a front page article entitled: “Barclays bank forced to admit it paid just £113m in corporation tax in 2009”. This article, by Jill Treanor, rather luckily coincided with a time of UKUncut protests, and as such caused a firestorm on Twitter over that weekend. The article suggested that Barclays had earned £11.6bn of profits in 2009 (their tax year is also the calendar year) and only paid £113m Corporation Tax. A quick reference to the accounts shows firstly that £6.8bn was a one-off profit due to the sale of Barclays Global Investors (BGI) to Blackrock, which is treated differently for tax reasons (possibly under legislation introduced by Gordon Brown, though I am happy to be corrected on this, if wrong). In that year Barclays incurred a £43m tax liability on the disposal of BGI. Excluding the one-off disposals this leaves the profit from operations of £4,559m (notice that £4,559m plus £6,777m do not make £11.6bn, but £11.3bn – the Guardian appears as bad at basic maths as its reputation is for spelling). On this £4,559m operating profit it paid £1,047m in tax, an effective rate of 23.0%. The Guardian claimed that Barclays only paid £113m in Corporation Tax: It did; Corporation Tax is the UK’s name for its tax on company profits, but a tax on profits isn’t unique to the UK. Companies usually pay their tax on profits in the country in which those profits are earned. This is common and obvious: why would a government let a company trading locally repatriate all of its profits to pay tax in a lower tax regime, unless forced to by tax treaties? So Barclays paid overall 23.0% tax on its operating profits, although only 10.8% of this was to the UK tax authorities. Is that a bad thing? For the UK, possibly yes. For the other countries in which Barclays operates, employs people, offers their services and pays tax: no, it’s a good thing. If people want to be jingoistic, racist or just ‘patriotic’ and believe that UK-based companies should only pay a tax on profits in the UK, then let them have their outdated attitudes. However we should recognise that we inhabit a global market, and so many UK brands and companies are no longer owned by UK companies: Santander owns a whole swathe of former UK banks and building societies; Telefonica owns O2; etcetera. To believe that a UK company is UK only and should only pay tax here is a ridiculous view in this day. In addition to the payment of tax in the locale that the profits are earned in there is another mitigating factor already covered: the carrying over and offsetting of losses in previous years. Barclays was one of many UK banks that suffered due to the nearly global collapse of the banking markets in the sub-prime crisis of 2008, the preceding year to that targeted by the Guardian’s article. There were undoubtedly considerable losses: its value on the balance sheet fell by £673bn in 2008 and £111bn in the following year. As a comparison Guardian Media Group earned £591m in revenue across the two comparable financial years covering 2008-2010 and paid ‘no Corporation Tax’ by their definition (actually receiving a £30m tax credit, equating to 5.1% tax refund). This was because they made a loss of £267.7m.
At a time when journalism as a profession is under detailed scrutiny from both the Leveson Enquiry and the Select Committee for Culture, Media and Sport, I would expect the Guardian to ensure an article that is couched in such accusatory terms (“Tory donor firm paid no corporation tax”) is at least technically correct. On the financial aspects it is not; it could be considered professionally negligent of Syal and Hughes at best, or deliberately misleading by its enemies. It highlights a potential lack of governance controls at the paper, which Alan Rusbridger and the rest of the Guardian Media Group board should be concerned with, for the attention that sloppy reporting like this may bring in the current climate. Also if Lycamobile was an exchange-listed company there could be a significant impact on its share price and trading volumes following publication of an article such as this, potentially resulting in investigations from the Financial Services Agency or other exchange-based authorities.
For the sake of the Guardian, a newspaper I love, I would hope this is just basic negligence on a long bank holiday weekend. They should be concerned, as it wouldn’t take much scrutiny from Jay and Leveson, with their power to access emails and texts, to get to the cause of such sloppy reporting and identify governance failures. Guardian: I expect better.
 Declaration: I was a member of Essex University’s Conservative and Unionist Association, affiliated to the Federation of Conservative Students, in 1987-1989. I resigned on principles of libertarianism.
 Telefonica O2, Everything Everywhere (the merged Orange and T-Mobile), 3 and Vodafone.
 The Republic of Ireland is a useful example: at 12.5% its corporation tax rate is one of the lowest of major countries in the EU and so many companies, especially from the UK, have relocated their head offices there to take advantage.