Why Amazon UK's tax bill has fallen: the real explanation!

Once again, the release of the results for a major foreign corporation has led to mass hysteria in the media about overseas companies not paying their fair share of taxes and adopting illegal and unethical practises.
Amazon UK saw a 50% fall in the amount of UK corporation tax it paid last year despite recording a 54% increase in turnover for the same period (£1.46bn from £946m in the previous year).
 
Having tried (and failed) to find a single article that presents an actual explanation as to why this is, I thought I would try to write one myself… 
 
A simple explanation
Although it is much more interesting to talk about tax avoidance and the scandal of foreign corporations ‘exploiting’ the UK tax system, the answer as to why Amazon UK's tax bill went down is actually pretty simple.
 
Corporation Tax is paid on profits and not turnover. Last year, Amazon UK’s profit was £48m. This year’s profit was £24m. Amazon UK therefore paid £7m Corporation Tax compared to £15m last year.
 
So why were profits so much lower this year? 
 
Staff incentives schemes
One of the major reasons Amazon profits fell is that Amazon gives its full-time employees shares worth around £1,000 each year in the company. They can’t be cashed immediately but must be held for a period of one to three years.
 
Giving shares to staff can be a really useful way to incentivise a workforce. It is a practice used by companies of all sizes, including many tech start-ups, and yes, it can also be tax efficient.
 
Over the past two years, Amazon’s share price has nearly doubled meaning shares worth £1,000 granted in August 2015 are now worth nearly £2,000.
 
This means that staff expenses goes up (as the share award is treated as staff remuneration) - and if expenses go up then profits go down.
 
So who wins?
The employee wins through a tax-free windfall – HMRC rules allow employees to receive shares up to £3,600 tax-free.
 
Amazon wins because it can pay out less cash and reduce its tax bill.
 
Clearly HMRC loses because the tax bill goes down. This is not guranteed however and relies upon the companies share price going up.
 
The important question however is what about the UK as a whole? Does a happy workforce then go out and spend more in the UK and help economic growth and well-being in the UK in other ways?
 
I won’t pretend to know the answer to that... but certainly the practice of giving staff shares is widespread, is generally seen as a good way to promote loyalty and engagement - and above all, is completely legal!

More articles from Simon can be found here
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