Movie rental chain’s UK franchise was charged £78m in royalties for use of brand, IT systems and other rights by US parent
The UK division of Blockbuster, the 528-strong DVD rental chain which went bust last week, delivered less than £250,000 in corporation tax over a 15-year spell in which it made sales of more than £3.5bn from British film-lovers, a Guardian analysis has found.
Over the last 15 years for which accounts are available, Blockbuster’s UK operation struggled to consistently break into profit but the British offshoot was nevertheless charged almost £78m in royalties – for use of the Blockbuster brand, IT systems and other franchise rights – by its then parent Blockbuster Inc. Between 1996 and 2010 the business posted net tax charges of £248,000 on cumulative profits of £37m.
Royalty payments, and other intra-group transactions within multinational corporations, have become the subject of heated political debate lately following revelations about aggressive tax arrangements entered into by the likes of Google, Amazon and Starbucks.
David Cameron this month pledged to make “damn sure” such firms pay their fair share in the future. “It’s simply not fair and not right what some of them are doing by saying: ‘I’ve got lots of sales in here in the UK but I’m going to pay a sort of royalty fee to another company that I own in another country that has some special tax dispensation.'”
One expert pointed out that while Blockbuster UK’s royalty payments of about £5m a year undoubtedly reduced the group’s tax bill in Britain, it does not necessarily follow that the arrangement lowered the overall group’s tax bill.
This weekend, administrators from Deloitte confirmed plans to close 129 Blockbuster stores, a move which will put 760 of its 4,190 staff out of work. A further 31 stores, with about 155 staff, had been earmarked for closure. The future of the remaining shops remains uncertain but administrators have warned further closures may be necessary.
The Blockbuster multinational parent group itself filed for bankruptcy protection in America three years ago, emerging in 2011 as a subsidiary of US satellite broadcaster Dish Network.
Dish, which has since struggled to turn around the group’s fortunes, finally gave up on the ailing UK operation last week, calling in administrators. Deloitte insolvency experts have begun an urgent search for a new backer for what they hope is a viable core of the UK business.
The US parent is said to be the largest creditor, reputedly owed £23m in loans and unpaid royalties by its UK subsidiary. While royalty bills from the US are understood to have continued after Blockbuster was taken over by Dish in 2011, the satellite broadcaster is believed to have refrained from collecting on these sums owing.
The parent group is said also to have offered other forms of assistance to its struggling British operation, though no accounts are available after 2010.
Royalty payments and other intra-group charges at multinational companies have been attacked by tax reform campaigners for being driven more by tax management than broader commercial logic.
Starbucks was subject to consumer boycotts and protests last year after a Reuters investigation found the business had paid only £8.6m in UK corporation tax over 14 years.
Over the same period its British subsidiary had made sales of more than £3bn. In particular, protesters were angered at the group’s royalty arrangements, whereby the UK business paid a fee of about 6% of turnover a year to other units of the Starbucks group, effectively migrating earnings to another jurisdiction.
Revenue and Customs is only supposed to permit such arrangements if multinational groups can demonstrate that brand licensing agreements, or any other intra-group trading, are conducted at “arm’s length” – that is, as if the companies are not part of the same group.
Many global businesses, such as Wal Mart and McDonalds, have UK businesses which pay royalties to a US parent for rights to use the brand. But such payments become harder to justify when it looks as if the rights are doing little to enhance the UK division’s profit performance.
Blockbuster’s royalty payments, as a proportion of sales, were a little over 2% – considerably less than those paid out by the likes of Starbucks (6%) and McDonalds (4%). Blockbuster’s former chief executive Martin Higgins is working closely with administrators on attempts to find a backer for the business and was unavailable for comment. Administrators from Deloitte also declined to comment.