As the Guardian, and many papers, report this morning:
Alliance Boots, which became Britain's biggest private equity buyout in 2007, could have received UK tax bills of more than £1.1bn over the last six years, had colossal interest payments on the group's billions of pounds of borrowings not depressed the chemist and retail group's UK profits, according to tax campaigners.
A report, commissioned by Unite, War on Want and US union group Change to Win, found that Alliance Boots generated UK taxable profits, before interest costs, of £4.5bn between 2008 and 2013. But it also incurred financing costs of £4.2bn over the same period, reducing its UK taxable profits to just £313m.
Now in a sense this story is not new: Boots has been the focus of previous UK Uncut action and I think I discussed it once on Radio 4 or maybe elsewhere. But the story is significant for three reasons.
The first is the scale of the loss.
The second is the fact it is continuing and there is no sign of change.
The third is that this brings Unite into tax campaigning in a bigger way - which is good news.
So I should declare an interest: I am a member of Unite and advise it on tax related issues but although I was asked to help with this story did not have time to do so.
But I do think the Unite press release is well worth sharing:
Taxpayer-funded firm's gain worth 78,000 nurses, two years' prescription charges or 5.2 million ambulance calls
Shoppers at Britain's largest high street chemists Boots are today warned that its parent company has avoided at least £1.12 billion tax since going private six years ago, enough to pay for two years' prescription charges in England, the starting wages of 78,000 nurses or 5.2 million ambulance calls.This revelation appears in a new report, which unveils for the first time the full extent of tax avoidance by the multinational pharmacy-led health and beauty group Alliance Boots.
It will be launched this afternoon by Britain's biggest union, Unite, the UK anti-poverty charity War on Want, and the Change to Win federation of US trade unions, with a call on Alliance Boots to disclose its tax returns and shed light on its web of debt strategies.
The three organisations are calling for action from the UK government to modernise the outdated tax system, which allows companies to manipulate their profits to avoid taxes, and to make transparent significant public contracts through which major corporations profit from the public purse. They call for:
- Alliance Boots to disclose key tax and financial information;
- An investigation into Alliance Boots' tax practices;
- Modernisation of taxation of private equity-backed businesses;
- Reform of taxation in British Overseas Territories, and;
- Transparency and accountability for public contracts undertaken by private companies.Alliance Boots draws an estimated 40 per cent of its UK revenues — £4 billion — from prescriptions and related services, mainly paid for by the UK's taxpayer-funded National Health Service.
The company is seeking to expand into medical services traditionally supplied in hospitals, family doctors' practices and community health clinics, largely paid for by public funds.
According to the report, the company went into massive debt to fund its 2007 buyout and is likely to have apportioned this liability to reduce its corporation tax by about 95 per cent over six years.
The transaction was led by US private equity firm Kohlberg Kravis Roberts & Co. L.P. and the company's billionaire executive chairman Stefano Pessina, who lives in tax-free Monaco.
Several Pessina and KKR-related entities with stakes in Alliance Boots operate in other tax havens, such as Luxembourg and the Cayman Islands.
In 2008, Alliance Boots relocated to the low-tax canton of Zug, Switzerland, even though the company generates no revenue there. The holding company that owns Alliance Boots is located in Gibraltar.
Now the firm's private equity backers are selling Alliance Boots to US pharmacy chain Walgreens, standing to make over 200 per cent profit on their investment.
Jim Sheridan MP will host a lunchtime event in parliament to launch the report, with spokespeople from the report's co-authoring organisations.
Statements from Sponsoring Organisations:
Len McCluskey, general secretary of Unite, which has long campaigned to protect NHS services, said: "The revelation that yet another high street name is fleecing Britain, taking work from our NHS while avoiding their tax responsibilities, will leave taxpayers furious. Boots has deliberately woven a web to support its tax avoidance habit, the scale of which is so big it could have paid for two years' worth of prescription charges for everyone in England.
“Tax avoidance is now part of the DNA of a corporate British culture that is rotten to the core. While this government pursues the needy with a single-minded cruelty, George Osborne does little to stop corporate Britain from stripping earnings in the UK and sending profits to tax havens.
“Boots has abused the trust of the British public and must immediately come clean on its tax affairs, and act more responsibly towards this country.
“And if it will not, the government must make it, by closing the tax avoidance loopholes and not granting public service contracts to companies that avoid their tax liabilities. These practices must not be rewarded through the public purse."
John Hilary, executive director at the anti-poverty charity War on Want, said: “It is utter hypocrisy that Boots relies mainly on the NHS for 40 per cent of its UK revenues, while at the same avoiding its own tax responsibilities.
“This is just the latest in a string of scandals that make a mockery of the government's supposed crackdown on tax dodgers, which instead delivers rhetoric on tackling tax avoidance, including Britain's overseas territories, but which amounts to nothing.
“Ministers have allowed corporations such as Boots and its private equity owners to abuse the UK's tax system. It is time for proper rules to make companies like Boots pay their fair share.”
Nell Geiser, associate director of retail initiatives at Change to Win, called for action to eliminate the ways in which companies can avoid tax:
“After avoiding hundreds of millions in UK tax through massive borrowing, Alliance Boots' private owners are selling out and stand to profit handsomely. Corporate tax avoidance is not going away unless we shine a light on it and unless policy makers act decisively. This is an international issue but our report gives the UK government every reason to act more forcefully to limit abuses by private equity backed firms like Alliance Boots.”
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What do you make of the hypocrisy allegations against Unite? Hard to say without the full facts but McCluskey has vehemently denied any wrong doing. I see Priti Patel has weighed in accusing them of ‘aggressive tax avoidance’. Is this accusation fair, just mischief making, or something more sinister?
It’s just normal anti-union bashing
This seems to be the “Leveraged Buyout” made infamous by Milt Romney’s Bain Capital – a way to buy the company by borrowing against its assets and then when in chage. loading these debts against the company balance sheet – it seems to me this is a sort of scam – piracy without ships, where you steal the company for nothing then grab part of its profits or assets as the reward for doing nothing constructive.
The tax avoidance is part of the worldview of these predators – that “tax is for little people”, in the infamous words of Leonora Helmsley. It’s not like we need those nurses or ambulance callouts is it :-(?
Interesting that you refer to Unite’s campaign against tax avoidance as Unite is currently in a dispute about what HMRC are calling VAT avoidance.
Were you advising Unite on their VAT plans?
Is it OK if Unite say they are reducing their tax bill by what they say are legal means but terrible when Boots do the same?
As far as I can see, Boots are not avoiding tax, they are being tax compliant. Just like Unite.
I have not advised Unite on VAT
Nor do I know of the dispute
http://labourlist.org/2013/10/mccluskey-hits-back-at-the-times-over-vat-claims/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+LabourListLatestPosts+%28LabourList%29
And, for humour value:
http://www.conservativehome.com/leftwatch/2013/10/priti-patel-letter-to-ed-miliband-reject-unite-donations-until-mccluskey-pays-the-unions-missing-vat-millions.html
http://www.unitetheunion.org/news/unite-denounces-the-times-as-highly-misleading/
I think this is interesting. All quotes from Unite mirror almost exactly every private company which has had its affairs scrutinised. What are your thoughts, Richard?
I think the Unite comment is interesting for something quite different
Unite makes clear two systems have had to be reconciled and differences existed. That happens in VAT – especially in partial exemption as I suspect very strongly exists here
The real question is why was this leaked?
That’s nothing like a commercial situation. That never happens there
Why is it leaked.
I cant see the Times, because its behind a pay wall. I wont pay Murdoch and money, ever.
However I have seen a few articles over the past few days. It seems that the Times is starting to go after non tax payers, or people using the system. I don’t think the Times is anti Unite or any unions at the moment. They appear to be after everyone regardless of who you are.
It would appear someone has got inside the HMRC office.
It’s hard to say without more information. It doesn’t seem to be a simple reconciliation based on the comment that has leaked from HMRC, though. My suspicion would be that it has leaked because someone thought it was outrageous and hypocritical; but as with all media stories relating to tax it’s easy to assume lots of things without knowing all the facts (and without taking into account the huge inaccuracies in these stories).
For those who haven’t seen, by the way, the comment from HMRC was apparently that Unite had been calculating its VAT in a “grossly unfair and unreasonable” way (that’s from The Times story).
But let’s be clear – HMRC never comment in a taxpayer’s affairs
Why the extraordinary exception here?
I believe it was leaked from direct correspondence with Unite – it’s not a comment which HMRC have published. My thoughts on why it is leaked? Someone saw the hypocrisy and wanted to expose it to the public, most likely.
Tax compliance means paying tax in the right place. Boots are a UK operation, so how it it tax compliant that what tax they do pay is paid in Switzerland?
What ways do you think companies should use to finance growth?
The wrong question
This was not a loan to finance growth
It was a loan to finance acquisition
Its own acquisition
Funny how all the Man Utd fans grasped this, when the Glazers took over the club using this device!
How come they, and all the other critics of that deal, haven’t joined the dots to get the full picture?
Fortunately, sufficient numbers of voters sussed of Mitt Romney’s real credentials as expert asset stripper, otherwise he’d probably be making a deal with the Chinese for the leveraged buy-out of Massachusets, if not the whole USA.
http://www.retail-week.com/sectors/health-and-beauty/alliance-boots-trading-profit-soars-as-it-targets-international-growth/5036762.article
Growth achieved through organic strategy.
They call for:
– Alliance Boots to disclose key tax and financial information;
– An investigation into Alliance Boots’ tax practices;
– Modernisation of taxation of private equity-backed businesses;
– Reform of taxation in British Overseas Territories, and;
– Transparency and accountability for public contracts undertaken by private companies.
All good, with the exception of three missing words (“and Crown Dependencies”) in bullet 4.
(Boots have an enormously long history in Jersey – the original Mrs Boot, who took the business from drug store to department store, was a Jerseywoman, and both she and Jesse died here, I believe as tax exiles)
This is a ridiculously simplistic analysis. When KKR and Pessina took Boots private in 2007, they did so by paying a premium of over 40% to the pre-announcement market price. This generated very substantial amounts of capital gains and taxes, the present value of which well exceeds the alleged ‘savings’.
The price paid by KKR and Pessina was obviously based on a certain amount of debt within Boots’ post-transaction capital structure, and a certain tax-treatment (ie. deductibility) on these interest-bearing instruments. Absent the deductibility, KKR would have paid far less. In essence, the UK government got an advance payment for the future taxes allegedly ‘avoided’, and in fact did extremely well out of this.
What is truly pathetic in this analysis is that it misses the real tax avoidance taking place at Boots.
By re-incorporating in Switzerland, the KKR London-based executives in charge of the investment will avoid all income and capital gains taxes on the performance fees worth several hundred million Dollars that the deal will generate at exit. KKR European operations are head by a German national, and the investment was led by an Irish. As non-domiciled tax residents in the UK, they are not liable for any unremitted profit or income on a Swiss investment.
I have to say that is one of the must absurd comments ever posted here
Remove interest payments as tax deductable expenses.
Great idea John Adams, apart from every UK bank would be instantly bust because the tax charge would be far higher than any profits they ever could hope to make.
banks going bust? -they do that to themselves don’t they?
@Simon. They do but surely even you would agree that a policy that wipes all of
them out by taxes only to put the same amount back into them to bail them out would be a bit potty?
Not if the outcome was more efficient for the economy as a whole. In that case your assumption does not work
Mary -with yet another(!!!) scandal emerging over aggressive interest swaps mis-selling which is destroying the livelihoods of people sunning small to medium businesses, I would welcome the next banking collapse of what amounts to an oligarchy of mafiosi thugs. The banks not helping the economy is one thing but ‘positively’ destroying it (which means real peoples’ lives) is too gross for words. Let the vile thugs collapse so that we can build a banking system that is trustworthy. To have bailed then out without root and branch reform was a GREAT mistake.
Let the public know and have it boycott Boots
Brilliant!
That would leave Superdrug as the monopoly and it is ultimately owned in a tax haven.
Damned hard where I live – All the chemists have been taken over by Boots 🙁
If Alliance Boots comply with the law on Interest allowability , then change the law.
HMRC have already done this for the new cash based accounting system for sole traders(if anyone is daft enough to use it).
But Parliament to do its homework first,by proper research and scrutiny, and then a restructured HM Revenue properly enforce it. We do great R&D in the UK for the sciences and medical research, why are we so rank amateurs when it comes to taxation?
It’s counter productive bashing one company, apart from illustrative purposes.
What’s frustrating is that the solution is so relatively straight forward.
But Stephen – the demand is for systemic reform
But without examples of abuse it will never happen
This has always been the case with evidence based campaigning
It would be great to be better funded
But look at what has been done with very little
J. Ledbetter You are assuming that banks should remain privately owned. The creation of credit should be a social function under the control of “The Courageous State”. Private banking has proven itself to be a spectacular failure. Hardly a month has gone by in recent years without a new revelation of gross wrongdoing. In deed the whole industry has been described by William Black the Chief Prosecutor under the Savings and Loan scandal as “criminalgenic”. Industry and commerce cannot function without credit. The credit advanced allows the production of wealth from which the original loan can be repaid. There is no equivalent production of wealth to cover the growth in interest charges. Interest charges increase mathematically without any consideration to economic events at hand. A compound growth rate of debt without any corresponding increase in wealth is socially disruptive. The ancients understood the economics of credit much better than us. That is why the major religions forbade usury. Obliviously banks must cover their costs, but any profit the Courageous State makes can be re-cycled for the common good. I believe the Bank of England has recently rebated £33b to the Treasury in this way.
Private Equity deals are always highly leveraged. This is partly to reduce the amount that the investors have to put in themselves i.e. they get the banks to finance the deal. Banks go along because they charge premium interest rates on a highly leveraged deal – they may also of course be involved in the deal and get deal fees so double bubble for them.
But clearly a benefit of high leveraging is that the interest payments are tax deductible, whilst dividend payments to investors would not be deductible. The theory of course is that the interest received by the banks will be taxable as profits in their hands, but when the finance is routed via a branch in a tax haven, then that theory doesn’t work.
Germany, Italy – and now Norway too so I read today – have a solution … they limit interest deductibility to 30% of EBIT or EBITDA whether it’s intra group or external interest- Simple and it definitely works …
Back in 2007/2008 in my previous life the MNC I worked for acquired a German business from a private equity firm. It was highly leveraged and we were expecting to be able to continue getting the high interest deductions. Very shortly after the acquisition, Germany brought in the 30% rule and we were scuppered … lol 🙂 Even funnier we did the same thing and had the same problem very shortly afterwards with an Italian acquisition after the Italian government saw what Germany had done, realised it was a good idea and followed suit.
Another solution is withholding tax on interest payments, but I suspect not politically acceptable for interest paid to ‘friendly’ nations.
And the UK remains a walkover
Which more than justifies highlighting the issue
Well we do have the wonderful worldwide debt cap rules but what can I say … To avoid expletives ..Complictaed and Inefficient!
The German/Italian/Norwegian solution is so much more succinct/efficient and quite elegant in its simplicity.
I tend to agree
A technical point on your comment. Interest paid to a tax haven would be subject to uk withholding tax so your comment is incorrect
No it isn’t
And you well know it is not
Theoretically that can be the case
But clearance can always be secured
Could someone explain to me how this is tax avoidance?
The interest will be taxed when it reaches the recipient of it. We’ve actually no evidence at all that less tax has been paid in total here. Only that a different group of people will be paying tax. Instead of the corporation paying tax on profits (or the incidence of that on shareholders and workers) we have the recipients of interest paying tax.
As I say, we’ve absolutely no evidence at all that less tax is being paid in total.
Tax avoidance only exists in relation to a state
The UK has lost revenue as a result of this action.
How can this not be avoidance?
By that standard my living in Portugal is tax avoidance. The UK has lost tax revenue. You as an Irish passport holder are tax avoiding in Eire similarly.
Which is ridiculous. I am paying tax here. You are paying tax in the UK. Neither of us is tax avoiding through living in a country different to the passport that we hold.
Whichever way we split the economic surplus produced by Boots, whether the tax is paid on interest received or on profits makes no difference to the fact that tax is being paid on that economic activity. Thus it’s very difficult indeed to call it tax avoidance. Just like my decision to live in the sunshine and yours in Norfolk is not tax avoidance.
Simply wrong Tim
The fact is you live in Portugal so you owe Portugal
I live in the UK so I owe the UK
The economic substance and tax coincide
That does not appear to be remotely the case for Boots
The profits are earned here and shifted elsewhere – and the interest offset does not relate to the business – it relates to its acquisition
You are simply offering sophistry – as ever
An interesting conundrum: The company was bought by no-money, borrowed from banks that have none, the interest on the no-money is paid to the banks and tax exemption is claimed on no-money loaned by organisations that are insolvent?
I’m sure Gordy could have secured a better deal for us…..oh well!
Yes -it’s a Ponzi scheme; see http://planetponzi.com/