What you need to know
- Apple has posted UK retail profits of £37 million.
- It recorded nearly £1.4 billion in revenue in 2019.
- Despite this, only £6.2 million will make its way to the government in taxes, drawing a swathe of unmerited criticism.
Apple most recent UK tax filing has raised some eyebrows regarding how much tax the company pays in the country for no apparent reason.
Filed June 8, Apple's statement of comprehensive income reveals that Apple turned over nearly £1.4 billion in retail revenue between October 2018 and September 2019 last year. Yet the filing reveals Apple will only pay tax of £6 million, and that this sum will be reversed. Several outlets including 'i' have been quick to call out Apple, throwing around notions of tax avoidance, as is customary whenever this seems to happen.
Tax of just over £6 million on £1.4 billion makes for a loud headline but ignores some of the most basic fundamentals of business in the UK. Firstly, companies pay tax on their profits, not their revenue.
A quick reading of Apple's accounts reveals that Apple's cost of sales on its £1.4 billion in revenue was more than £1 billion, leaving a gross profit of £337 million. From this, Apple deducted £327 million in administrative expenses, and recognized £27 million in operating income, leaving an operating profit of £37 million. Give or take a couple of interest payments, that leaves a profit before tax of just over £39 million. Like every other business in the UK, it is on this figure, not the £1.4 billion, which is the starting point for calculating how much tax Apple pays in a given year.
High costs?
So why are those costs so high? The only reference Apple makes to its cost of sales is that its distribution costs are now included in the figure. However, these represent a mere £721,000, a drop in the ocean against one billion. The filing explicitly notes that this figure has been deemed "immaterial" against the £1 billion sales cost.
Any suggestion you might see that the cost of sales is so high because Apple is funneling money to some other country is wild speculation, as there is no information within the filing to suggest this. If Apple was somehow funneling the cost of making its products to another country, it would make the balance smaller, not bigger. To suggest that Apple's operating costs are so high because Apple is moving money to other countries is totally contradictory. If Apple moved those costs out of the UK, the number would be smaller, and Apple would be liable for more tax, not less... There is nothing within the filing to explain why Apple's cost of sales is as high as it is, but it is noteworthy that it has grown proportionally compared to 2018.
Administrative expenses?
Beyond the cost of actually making its products, Apple incurs administrative costs for getting them into the hands of customers. Notably, staffing costs. It paid £146 million in wages and salaries, £20 million in social security, £7 million in pensions, and nearly £30 million in share-based payments. Other admin costs not listed could include anything from rents on store locations to electricity bills.
Apple, like all UK businesses, is not liable to pay tax on its turnover before the cost of sales and administrative expenses have been removed.
Reversal?
As 'i' and other outlets have pointed out, Apple expects its tax bill of just over £6 million to be reversed in the coming financial year. Despite what has been suggested, this has nothing to do with Apple's expectations of poor performance in this current financial year, nor anything to do with Apple's contributions to UK COVID-19 relief efforts, the sourcing of PPE, etc.
It is simply the result of a deferred tax asset. As noted within the account, Apple has a recognized deferred tax asset of £6.1 million. A quick Google search will tell you that this simply an overpayment of tax by a company. In the context here, it means that Apple is liable for the tax as calculated, but that it has already paid this sum to the UK government.
Apple
In a statement regarding Apple's recent filings Apple stated:
"As the largest taxpayer in the world, we know the important role tax payments play in society and always pay all that we owe."We are very proud of our many contributions across the UK and last year spent over £2bn with hundreds of suppliers. Our investment and innovation supports more than 325,000 jobs in the UK and, in addition to our tax contributions, we also think it's important to do more for people and society. We focused our attention on supporting the response to Covid-19, making significant financial contributions and donating face masks and shields here in the UK."
The filing of course only represents Apple's retail operation in the country and does not account for any of Apple's digital services, such as sales of music, audiobooks, or subscriptions to services like Apple Music.
In relevant news, it emerged earlier this week that Apple can expect to hear a ruling in its landmark Ireland tax case next week. In 2016 the EU ruled that Apple owed Ireland some $14.5 billion in taxes, a ruling both parties have since appealed.
To sum up
Apple's income and tax are calculated by highly-regulated accounting firms. You can rest assured that if Apple was doing anything fishy or illegal to "dodge" or "avoid" tax in the UK, there would be a pretty big regulatory snafu.
