Companies using deferred-tax loophole to fund leap in dividends
THE PRIVATE rail industry is profiteering on £1.3 billion in unpaid tax and is using a deferred-tax loophole intended to encourage investment to fund massive increases in dividend payouts to shareholders, Britain’s biggest rail union reveals today.
Nearly half of the £1.5 billion in dividends paid out in the last five years by nine private train operators and rolling-stock companies has been funded by unpaid tax, according to a detailed analysis for RMT by tax expert Richard Murphy of Tax Research.
Almost £1.3 billion of deferred tax is owed by the biggest six train-operating companies (Tocs) and the three rolling-stock leasing companies (Roscos) – but this is tax that will most likely never be paid, and is effectively a hidden subsidy that dramatically increases cash profit levels.
The report shows that the nine companies’ declared profits almost doubled from £435 million in 2002 to £810 million in 2006, but their declared tax charges remained almost constant at about £190 million a year throughout the period. The declared percentage rate fell from 43 per cent in 2002 to 24 per cent in 2006.
This though hides the real story. Tax is not paid on accounting profits. The accounts charge for goodwill is not, for example, allowed for tax. And the charge for tax in accounts includes ‘deferred tax’ – which this survey shows is never likely to be paid, as well as the current tax bill the company expects to settle in cash.
Comparing pre-goodwill profits and current tax charges that will actually be paid shows that these companies’ profits rose from £584 million in 2002 to £894 million in 2006, and that the tax they actually paid plummeted to £109 million in 2002 and just £71 million in 2006, at a rate of just 7.9 per cent in that year.
The study also reveals that by 2006 one pound in every three used to fund the private-sector rail operators was represented by deferred tax – which is in effect a tax-free loan from the government, with no repayment date.
“Deferred tax is supposed to be an allowance against investment and amounts to a hidden subsidy for rail firms, but it is being exploited to increase dividends to shareholders,” said report author Richard Murphy.
“Rail companies are hiding behind accounting rules when presenting their figures that let them suggest they’re paying more tax than they are, and that means the massive hidden subsidy the tax system gives them is not apparent. It should be,” Richard Murphy said.
“It might be legal but it shouldn’t be,” RMT general secretary Bob Crow said.
“Passengers are facing a future of massive fare increases and the government is cutting direct subsidy to the rail industry by £1.5 billion over the next six years, yet these private companies are sitting on a tax-break nest-egg worth £1.3 billion.
“This is money that should be funding railway engineering, but it is being used instead for financial engineering and turning hidden subsidies into pure profits for shareholders.
“At the very least the government should tell these companies to stump up the £1.3 billion they owe in tax and use the money to reverse the planned funding cuts.
“Better still they should face the fact that the private sector’s involvement in the railways is a barrier that stands in the way of delivering the growing, affordable people’s railway that our economy and environment desperately need,” Bob Crow said.
The companies whose accounts are analysed in the report are: First Group PLC; Go-Ahead Group PLC; Stagecoach Group PLC; Arriva PLC; National Express Group PLC; Virgin Rail Group PLC; Porterbrook Leasing Company Limited; HSBC Rail (UK) Limited, and Angel Trains Limited.
PS: 10am 5.10.07. The FT, Mirror, and at least 40 regional papers have covered this story this morning.
