More Corporate Tax Controversy as UK Utility Avoids Payments

Ongoing controversy in the UK on schemes used by major corporations to pay little or no corporation tax has flared up again on news that utility Thames Water paid no corporation tax last year, despite annual turnover of £1.8bn and profits of £549m.

The UK’s largest water company has been accused of “ripping off the taxpayer” as the same year saw it increase customer bills by 6.7% and award its chief executive a £274,000 bonus. Customers will see a further above-inflation rise of 5.5% in the current financial year.

Thames still managed to reduce its tax bill to zero and also received £5m credit from the Treasury by writing off investments against the amount it was due to pay the government. The company’s accounts also show it paid £328.2m interest on ‘inter-company loans’ via a Cayman Islands funding vehicle to pay external bondholders such as pension funds. Although the arrangement is legal, UK water industry regulator Ofwat described the large profits and complex tax arrangements of some water companies as “morally questionable”.

However, Thames Water’s finance director, Stuart Siddall, denied that the company was avoiding paying tax: “We have an absolutely clear conscience about everything we are doing. Everything is transparent. We are reviewed by Her Majesty’s Revenue & Customs (HMRC) every year as a major corporation and we are seen as low-risk because our tax is very straightforward.

“The Cayman Island companies are there purely to comply with UK company law requirements for the acquisition financing structure.”

Policy defended

The company’s chief executive officer (CEO), Martin Baggs, also defended Thames’s taxation policy.  “We have not paid much corporation tax in recent years because the government’s tax system allows us to delay, not avoid, payment of tax based on how much we invest,” he said. “Because we are investing £1bn a year from 2010 to 2015, more than any water firm in the UK’s history, we are able to defer a lot of tax payments to future years.

“The HMRC tax mechanism is called the capital allowance. Its aim is to encourage firms like us to carry out early and extensive infrastructure investment. If capital allowances did not exist it would mean one of two things: customers’ bills would be higher, or Thames Water would invest less.

Baggs added: “As things stand we invest record amounts while our customers’ bills remain the second-lowest in the sector, at less than £1 a day. Thames Water continues to contribute around £150m annually to the public purse in other tax, including central and local government business rates, pay-as-you-earn [PAYE] and national insurance [NI].”

Thames Water is owned by the Australian company Macquarie and a group of investment funds. According to Macquarie its tax bill was reduced by capital allowances on its £1bn per year investment programme. The remaining gains were offset by tax losses claimed from other members of the group.

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