Nick Cohen wrote eloquently in the Observer yesterday about the knighthood given to Philip Green. He noted that:
“in the spring, the BBC’s Money Programme calculated that Green and his family had ‘saved themselves’ £300m from their £1.2bn salary by living for a part of the year in Monaco, whose residents don’t pay income tax.Standing up for such paupers used to be the point of a Labour government. Even if it could not force the likes of Green to pay their fair share, it retained the power to shun them and make it clear that those who don’t contribute towards their country can’t expect their country to be grateful.
Even that modest defiance of the plutocrats is beyond Labour now. Yesterday, the Queen announced her birthday honours and high on her list was Green, who received a knighthood for ‘services to the retail industry’.
If I were in the Inland Revenue, I would fret about the moment when the little people who stupidly still pay taxes realise that the state is treating them like fools. It insists that they must hand over their earnings on pain of punishment by the courts, while inviting Philip Green to Buckingham Palace to be honoured by the Queen.”
I couldn’t have put it better. I would have corrected the figure for tax saved. It was £285 million, and I know because I was the person who calculated it and presented the number on air for the Money Programme.
But there is more to it than that. First of all, let’s put Green’s side of this. He said “no tax was avoided because none was due”. An interesting argument from a retailer but which means I hope in future he does not mention the word ‘save’ when promoting his regular sales because there will be no saving over the original price during such events since that original price is not due during the sale and, therefore the comparison cannot be made. Which just shows how disengenuous is his argument about tax saving because it is obviously contrary to current usage of English.
Second though, let’s be cautious about saying Green (or, perhaps his wife) enjoyed the biggest pay day ever in UK corporate history because there was more to this deal than met the eye. It’s true Green associates (and we can put it no better than that) received a dividend of about £1.14 billion. But a closer look at their accounts might suggest that this was not a pay day, more a financial architecture day. The reason is simple. A dividend is paid out of accumulated profits. But at the end of August 2004 (its year end date) the Arcadia Group had £291 million on its P & L account. In the year to August 2005, when the dividend was paid it earned after tax profit of £185 million (all data from Arcadia Group results announcement, by the way). That gives a maximum apparent positive balance of £476 million, out of which a dividend totalling £1,299 million in all was paid.
The result was obvious. At 27 August 2005 the profit and loss account had a deficit of £820 million on it and the overall accounts showed a deficit of £807 million. Borrowings grew by over £900 million in a year, which seems to have been used almost entirely to finance the dividend. The Arcadia Group parent company, Taveta Investments Limited showed a broadly similar consolidated position.
Now, I’m not for one minute suggesting wrong doing here. But my reading of the Companies Acts says dividends can only be paid out of accumulated realised profits, and my practical interpretation of this has always been that if a dividend leaves the profit and loss account overdrawn you do, at least in theory, have a problem to deal with.
No doubt PWC (who did not mention the issue in their audit of Taveta) found good reason why this was not an issue, and I’m sure advice was taken from learned friends, so all is fine. But given that the Greens did not pay tax on this deal it looks rather more like a bit of sophisticated financial engineering to me than the UK’s biggest corporate pay day.
Oh, and as usual there is a Jersey dimension to this story. Taveta Investments Limited in the UK is owned by a company of the same name in Jersey (just to confuse things) and it is owned by two nominee companies that appear to own each other. Which makes things as clear as mud when it comes to working out what’s going on.