A couple of weeks ago Npower were accused of not paying tax in the UK. The result was that 38 Degrees, the campaigning group picked up the issue. I looked at it and decided that Npower's claim that this was because of investment in the UK rang hollow. It seemed to me that it was because Npower was structured so that interest was paid from its UK operation to cancel profits earned, and since that interest was 99% due in inter-company loans that looked like deliberate tax structuring to me, so I said so.
The usual accusations then flew, not least being that if the interest was paid to Npower's German parent company then the tax rate there was higher than here so how could this be avoidance.
And, of course, the company said it had done nothing illegal, was not avoiding tax, HMRC knew all about its arrangements and so on. All of which are true, I'm sure.
But I wasn't happy with that: the Npower structure could not have been by chance and looked tax motivated. So with some more work, and after discussion with Richard Brooks at Private Eye, I set to work again.
The result is a new report published this morning by me for 38 Degrees, and a story in this morning's Sun (I didn't choose it).
The summary of the story is this:
- Npower is a complex group of companies, even in the UK, and much more so when considered as a part of its German parent company, RWE Ag;
- Npower does not provide a single set of accounts for the UK, which has added considerably to the confusion surrounding this issue;
- Npower has issued several quite different reports of its trading and profits in the UK. Depending upon the source used sales vary by hundreds of millions of pounds whilst profits reported by RWE and Npower for the UK vary between about £310 million in 2011 according to two reports, £240 million according to two other reports and a loss of £38 million according to the accounts of RWE Npower plc. It is almost impossible to tell which of these claims is correct.
- What is, however, clear is that according to RWE, (Npower's parent company):
- It has a profitable operation in the UK;
- That is true even after the costs of new investment in the UK are taken into account;
- At no point does RWE report a loss making activity in the UK.
- Despite this tax is not paid by Npower in the UK.
- RWE does appear to pay, if anything, more tax than might be expected of it in Germany. At a group level, and as a whole, based on an assessment of its German accounts, it appears not to be avoiding tax.
- However, when the structure of the UK operation is considered in detail it is clear that this is not true. Tax avoidance does appear to be taking place at this level. This is because:
- RWE does not mainly finance the UK operation of Npower with share capital. It does instead mainly use loans to fund the UK operation of Npower.
- Of the loans provided by RWE to Npower in the UK, totalling more than £2.7 billion in all, more than £2.3 billion are provided not by RWE in Germany but by a Maltese company that RWE owns called Scaris Limited.
- Accounts for Scaris Limited are not available but based on reporting by RWE in Germany it made a profit of at least £150 million in 2011 and maybe half of this comes from it making loans to Npower in the UK.
- Because Npower basically turns its UK profits into taxable losses by paying interest from this country to Scaris Limited it is likely that it has saved tax in the UK of maybe £108 million as a result of interest paid to Scaris Limited between 2008 and 2011.
- The interest received by Scaris Limited in Malta is likely to be taxed at between 5% and 10%, meaning a maximum tax bill on this interest in Malta of about £39 million, and maybe a lot less.
- If the interest is paid on by Scaris Limited to Germany as a dividend (which is almost certainly what happens) the income received in Germany from Scaris Limited would be tax free in Germany.
- The result is that Npower and its German group have saved more than £60 million a year in tax over four years by using this structure and maybe £100 million of tax in the UK has not been paid as a result of using it.
- It is very hard to explain why RWE would lend money to Npower via Malta unless tax avoidance was its motive. The tax saving that results are very clear.
- As a result it appears that Npower is shifting its profits from the UK to Malta by paying interest to a company based there with the only likely motive being a desire to avoid tax in the UK and in turn, and in due course, in Germany. Missing Malta out of the structure would mean that the tax was not avoided and as a result its use suggests that tax avoidance is occurring.
What this then suggests is that two demands should be made of Npower.
The first is that they stop avoiding tax in the UK and elsewhere by using tax haven subsidiaries to which they are deliberately shifting profit.
The second demand is that Npower clear up the confusion about its profits and activity in the UK by publishing a single set of accounts for the UK as a whole showing just what trade it undertakes here, how much profit it makes in this country and how much tax it pays as a result. The days when companies can issue multiple profit figures for one country should be consigned to history.
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Is this a fair summary? Keep the German tax authorities “happy” by paying a bit of tax on interest over there, but divert most of the interest yo that financial “power house” Malta. Ooooh, I wonder why?
Meanwhile back in Blighty rip off HMRC, because as far a multi-nationals are concerned it is no longer fit for purpose sorry I meant a tax collecting authority. If the multi national feels, like Starbucks, that its tax dodging ways may cause brand damage, then it is possible to sign up to a “Dave Hartnett”, a PAYL (pay as you like)scheme.
All done in the best possible taste, er not!
The UK seems to be plagued by “charitable” multi-national corporates. You know the sort that haven’t made any profits in the UK for 15 years, but operate here out of the kindness of their hearts, just to provide employees with an income!
There was silly old me thinking that if your operation didn’t make profits or in fact made losses like Tesco’s “Fresh and Easy” venture in the US, then you closed it down!
I am shocked that a multinational would even contemplate such a thing
That does look like a tax avoidance structure, yes. The interest which Malta only taxes at 10% is fully deductible in the UK at up to 28% in the period you’re looking at, so the inclusion of the Maltese company would seem to be just to take advantage of that rate (assuming that there’s no other substance to it, of course) by converting interest into dividends.
The structure seems to be avoiding German tax rather than UK tax, unless you consider that the company is thinly capitalised. They seem to have a roughly 2:1 debt:equity ratio, which is a little higher than HMRC’s preferred 1:1 but not enormously so – you’d only need to treat no more than about a quarter of the debt as equity to get back to 1:1. I wonder what HMRC’s view was – I assume they’ll have looked at it.
Thank you
I was right
And now you agree
Apart from that fact that if you add back the interest amounts suggested by Pellinor, Npower still makes a tax loss. So it doesn’t seem very good tax avoidance to pay tax (even at 10%) in Malta when there’s no UK tax saved by “excessive” interest payments.
Just not true
Richard, if even the Sun is attacking large companies’ tax avoidance schemes, your hard work, and that of thers, would seem to be paying off. Congratulations.
Good point James, I hadn’t followed it that far through.
To me the UK debt position looks slightly higher than I’d expect HMRC to be happy with, but not so high that they’d object very strenuously unless they ere upset about oter factors. And they don’t tend to pursue adjustments that will just reduce a loss, in my experience: they want to create or increase taxable profits.
Then we need stronger rules – which is precisely what the OECD is looking at
As you may not have noticed, and which has motivated my interest
Yes, now that you’ve had a look at the position in depth I’m happy to agree.
I’m not happy with unsupported assertions that something is avoidance, but backing things up with evidence makes me very cheerful.
No. Your claim was that Npower was engaging in tax avoidance by paying interest to its German parent. You further stated that it would still be avoidance if paid to a German bank.
I was wrong too! I bet my colleague the interest was being routed via Luxembourg; he said Switzerland. Neither of us saw Malta coming.
Be both agree, however, that you can’t claim ‘I was right’ if you were discussing an entirely different fact pattern. Furthermore, if the avoidance is avoidance because it’s UK tax that is avoided, then it still isn’t avoidance.
UK tax is avoided
Capital was placed in Malta rather than the UK to avoid UK tax
I am unambiguously right
I disagree: I think capital was placed in Malta to avoid German tax.
The question, the routine question in tax avoidance cases, is “what is the equivalent commercial transaction?”.
Here we have Germany investing capital in Malta to fund debt in the UK. If Malta weren’t there, would they have invested in the UK through equity(following from the existing German end) or through debt (following through from the UK)?
If they’d invested via equity, then the UK tax bill would have been higher than it was; if they’d invested via debt then the German tax bill would have been higher. The German increase would, based on headline tax rates, be the larger.
I would expect, on general principles, that they’d invest via debt as that is more flexible and, given £1.2bn of equity investment already, more common commercially.
On the other hand, if they’d invested via equity they’d have had a lower overall tax bill (probably), but investing wholly in equity would be unusual, in my view – I’d suspect tax avoidance in that case too.
Of course investing as they have done avoids tax, but is entirely legal and not particularly aggressive. But if we assume that because there’s a higher-tax way of doing something we should adopt that route, then the additional tax could fall either in the UK or in Germany – but probably Germany.
They committed capital
That’s a fact
So the alternative is where they committed it
If they’d committed it here more UK tax would have been paid
It follows UK tax was avoided, as a matter of fact
They in Germany committed capital, yes. They in the UK committed to debt.
Without Malta, I’m not sure which would have happened. Commercially I would expect debt, but if the finance chiefs have an eye to the total tax bill they might prefer equity. In my experience of companies that size it could go either way.
It’s all one company
Don’t be stupid
No, it’s several companies. One group, maybe, but that’s not the same thing.
If you think it should be the same thing then fair enough, and I understand that with Unitary Taxation you’re arguing for groups to be consolidated for tax purposes.
As with current company law, UK tax law treats individual companies, even within a group, as separate entities.
But even if you regarded the UK activity as a branch of the German parent rather than a separate entity, under normal branch accounting for tax purposes you’d include a notional interest return on financing, assuming a normal commercial level of debt. It’s rare to assume that a branch would be fully equity-funded when apportioning profits to it. Again, I know you think this is the wrong approach, but at the moment it’s the one which is legally mandated. It may result in less UK tax, but “less” and “not enough” are not necessarily the same thing.
Utter nonsense
The days when we pretend companies under common control are independent should be long gone
Only lawyers and charlatans believe that’s true
The companies do not and laugh all the way to the bank that tax authorities do
I’m describing what is, not what should be.
I can’t advise clients, they they can’t file tax returns, and HMRC can’t collect tax, under the rules that should be in force. We can only use the ones that are.
Now I agree that companies under common control are an area that needs tight rules on, and I don’t think the rules we have are as good as they could be. But there are two debates here – “are the rules objectionable?”, and “are Company X’s activities objectionable?” – and I think it’s important to keep them distinct.
Yet again I say – unless we have examples of the need for change then change won’t happen
Are you really so stupid (I use the word advisedly) that you can’t see that?
I entirely agree with you on that point.
Where we differ is that you seem to want to say the companies are at fault because the rules give results you don’t like.
When someone drives at the speed limit of 30mph down the road near me that clearly ought to be a 40 limit (given that it’s a dual carriageway with very few turnings and no houses along the sides), I don’t complain at the driver for going slow: I mutter about the local authority for setting an inappropriate limit.
You are, quite appropriately, urging Government to change the rules to those that you would like. But I think it inappropriate of you to castigate people for following the rules.
I just wish you’d stop swearing at the drivers 🙂
If everyone drove at 30 there would be no need to change the rules
So we have to point out the danger those driving at 40 create
And swear at them for doing so
I’m not talking about people breaking the speed limit by driving at 40 in a 30 zone, I’m talking about people (myself included) abiding by the speed limit by driving at 30 even though I think it ought to be 40.
Not commenting on Npower, but if we reversed the situation, would we still be caring (Im just wondering whether the outrage is tax avoidance generally or just that its UK tax avoidance)
ie if it was Npower Germany borrowing from a UK HQ – so tax relief at German rates (subject to their EBITDA cap) and taxable interest income in the UK at 20% say – there would be an overall advantage due to the large difference in tax rates between the UK and Germany. Would we also be outraged again?
The UK will not now tax interest earned overseas at more than 5%
That’s why Osborne has allowed the creation of offshore treasury functions
And yes I sure as heck complain
It depends what you mean by “interest earned overseas”.
A UK company lending to a German one would have the interest receipts taxed at full CT rates. A CFC of a UK company would not be taxed at much more than 5% if it fell within the finance company rules. I don’t see the rationale for that relief myself, but as I don’t deal with many financial sector companies these days I haven’t followed that debate terribly closely.
I’m sure HMRC will have reviewed any structure within npower’s tax calculations, including tax gearing ratios. Therefore, it is likely that Npower is operating within boundaries agreed with HMRC. So, the disappointing part of this article and comments is that Npower is the focus of attention. Surely you should be aiming your comments at HMRC and the government if you believe that either a) the rules are wrong or b) the referee is mis-interpreting.
I despair of you people: examples make the case for change
Would we have abolished slavery without taking into consideration the then legal activities of slave owners? No, of course not
Ditto, the legal activities of companies
You miss the point. Raising the example is not the issue, but the focus on one particular company is unfair and damaging when they probably felt they were following the rules.
Your comparison to slavery is sensationalism worthy of the tabloid press and not the blog of an expert.
My guess is that you have used tax efficient mechanisms yourself, probably ISAs, allowances etc. Why not publish your last three tax returns and lets see if people believe your use of the rules is fair?
Utter nonsense. Npower said they were not tax avoiding. They are.l Of course that was worth exposing
And as for the slavery issue – tax havens enslave 99% of the people in this world. The analogt is a very good one
And yes I do pay into a pension and did once use an ISA. But that’s not tax avoidance. Only an uninformed commentator could say it was
Margaret Hodge says that KPMG advising clients to use the Patent Box is objectionable tax avoidance.
The Patent Box is a regime designed to give tax savings if the taxpayer does certain things.
ISAs are a regime designed to give tax savings if the taxpayer does crtain things.
The two are exact parallels. If using the Patent Box is tax avoidance, then so is using an ISA.
Now I agree that they both are tax avoidance: I just think it’s acceptable tax avoidance.
Margaret Hodge objected to people abusing the patent box rules
That’s not the same as paying into an ISA in accordance with the rules
Please get your facts right or you’ll be deleted in future
The PAC report explicitly says about the Patent Box:
“We are nonetheless very concerned by the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax.”
The specific problem it identifies is:
“The brochure ‘Patent Box: what’s in it for you’, suggests that the legislation is a business opportunity to reduce UK tax and that KPMG can help clients in the ‘preparation of defendable expense allocation’.”
Now I have a lot of reservations about the Patent Box, but the way it is set up is quite clearly designed and intended to reduce the tax bills of companies that use it. That is exactly what the KPMG brochure says it’s attempting to do. I cannot see what is objectionable about that: it is precisely fulfilling the stated intentions of Parliament.
Get real
It’s about how to bend into the rules
By “bend into the rules” do you mean “change your behaviour in order to qualify for a tax relief”?
Is that your euphemism?
It’s not a euphemism, it’s a genuine question. I don’t know what you mean by “bend into the rules”, and I’d like to.
If a company doesn’t qualify for the relief now, the only way it can do is by changing what it does: acquiring a patent and developing it, for example.
The rules are pretty clear on that front: you have to be doing development work in order to qualify (I was talking to a client about this just yesterday), and it has to be on qualifying IP that you’re using in a trade.
So if a company actually does what it says on the Patent Box, it should qualify for the relief. If it doesn’t then it won’t. I don’t know what you mean by “bending”.
Do you known anything about IP, for a start?
And how easy it is to seek to patent absurd ideas?
Yes, I know a reasonable amount. If I didn’t, I wouldn’t be advising people on the tax treatment of it.
If patents are granted on absurd ideas, is the onus not on Government to tighten up the patent rules, rather than complicate the tax rules? I think it fair enough for a tax regime to assume that the other regimes it relies for effect on are fit for purpose.
This is one of the things I don’t like about the Patent Box, by the way. But it seems to be something Parliament likes, so although I’d prefer a different situation I bear up and follow the rules as writ.
It’s never the absuer’s fault with you is it?
I seriously wonder if people like you are in the camp that argues girls in miniskirts ask for trouble
Abuse is always the abuser’s fault.
Doing what someone explicitly says they’re happy for you to do is not abuse. Guessing about what they want might be.
If Parliament explicitly says “if you do X, you can have tax relief”, and a company does X, then they should get the tax relief.
If Parliament thinks that X is a bit too broad, then they should say “if you do Y, then you can have tax relief”, and if a company does X then tough.
If Parliament thinks X is fine and I think it’s too broad, then I should take it up with Parliament.
If Parliament is a bit unclear about what it says, then there’s the possibility of abuse. The Patent Box is pretty clear about what it applies to, in my view.
Heard of the General Anti-Abuse Rule?
And the General Anti-Tax Avoidance Principle that will surely follow?
Time to brush up on it, I think
You will be aware of the carve-out in the GAAR that says that if Parliament explcitly allows it, it’s not abuse. Which is exactly what I just said.
The GANTIP is an interesting idea, but in my opinion your draft bill is unworkable.
You have not read the GAAR
The nature of a discussion is that it goes back and forth between the participants, is it not?
That’s not my intention here
So five max is it
You say that very confidently for someone who doesn’t know who I am 🙂
I have read it – draft legislation and guidance notes both, when they came out, not to mention various condocs etc while it was gestating.
Re-checking it, I was thinking of the guidance notes rather than the legislation, but as they have pretty much legislative force I think it’s fair to include them as being part of “the GAAR”.
I also note that your GANTIP would make the point explicit, so I assume you are in favour of such an exclusion from the GAAR.
Para B4.4 of the Guidance notes:
“Using statutory incentives and reliefs to support business activity and
investment in a straightforward way (for example business property relief, EIS,
capital allowances, patent box) are also not caught by the GAAR.”
It does go on to say that reliefs can be abused, but there’s no suggestion of that inherent in the idea that KPMG would advise clients on using the Patent Box, which after all is a horribly involved set of rules. Have you actually tried to work out the impact it has on a company’s tax position? The situation I was looking at the other day was very simple commercially, but the tax got horribly complicated – helping those who don’t specialise in tax to understand it is not a trivial job. I’m not sure I have all the ramifications worked out myself yet.
Straightforward
Did you note the word?
It’s there for a reason, I know
Note my comment just made on another of your excessive comments
No more than 5 a day now please
I have a life
I thought I’d only been posting on this discussion? I can’t see a comment that you might be referring to.
You post incessantly
And candidly that can be tedious for me, and I suspect others
So you followed the rules to pay less tax. Assuming npower had agreed a thin capitalisation approach with HMRC, then I see no difference. i know you won’t agree, but then it is in your interest not to!
I did exactly what the law allows and encourages
And no one on earth can say that of the Npower structure
Which is why David Cameron has lashed out at companies doping just such things
But not at people who pay into pensions
So, respectfully, stop wasting my time
As you seem so comfortable calling Pellinor’s advice on Patent Box tax avoidance, perhaps you could explain what the guidance actually did mean. Because it is crystal clear that Parliament does intend for companies to make use of the provision. The HMRC guidance is equally emphatic.
By the way, I’m not in the least bit surprised you haven’t answered my previous comment.
As the GAAR makes clear, intention can be abused