As the FT reports this morning:
Thames Water has been slammed by public sector unions and politicians after the UK's biggest water company by revenue announced that it paid no corporation tax last year.
The disclosure reignited the controversy over aspects of the water sector's tax-efficient structures, which were criticised as “morally questionable” by Ofwat, the industry regulator.
To put this in context the Chair of Ofwat has said:
In the complex offshore ownership of some [water] companies, a good number use high coupon shareholder loans to improve equity returns from the regulated entity and apparently to reduce tax liability. This is not for Ofwat, but may be morally questionable in a vital public service.
We have not yet found a regulated water company that fully complies with the UK corporate governance code or satisfactorily explains why not.
So let's be clear, what Thames Water is doing is legal.
It's also intended to avoid tax. And to strip profit.
In that case the point is not whether this is legal: it is whether it is ethical and in that case whether the law is justificable or in need of change.
And let's not say Thames is blameless in all this. If they were not exploiting the situation the question of change would not arise, but they are, so they are completely responsible for the criticism they are receiving.
The question is, will anything happen? When water is vital to life, are we going to allow ourselves to be exploited by offshore private sector interests to secure it, or will we just accept it? And if politicians aren't discussing this, what are they for?
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Isn’t it true though they’ve invested £1bn that arguably they didn’t need to? So we win from that, if it’s true, as we get better infrastructure and delivery. They’ve contributed to society through that. One could argue that tax incentives to support infratructure investment and improvement are sensible as we, society, win either way. I’ve not seen details on what they’ve spent the money on though. If they’ve spent the money doing up their HQ while water pipes are leaking everywhere, well, that’s not so good!
I work as a civil engineer in the water industry Bill and I can catagorically assure you that none of the water companies spend a single penny more than they are forced to by the regulator. They never sort anything out properly, they just go for the cheapest, nastiest solution to every problem to get it off the list, often in full knowledge that the sticking plaster will soon fall off and it’ll be back on the list for the next round of spending. Of the half a dozen water companies I’ve worked with over the last 10 years or so I’d put Thames as joint worst in a pretty crowded field.
I’ve given up fighting this as it falls on deaf ears and quite frankly I’ve a living to earn. Not good news for water rate payers though.
.. and here are the figures, broken down for us by Mike Sivier. Oh dear… http://mikesivier.wordpress.com/2013/06/11/catch-22-for-pip-claiming-taxpayers-while-giant-corporations-pay-no-taxes-at-all/
I like(!) the euphemistic phraseology here: ‘Ofwat welcomes long-term responsible investment in our sector, and wishes to avoid and shorter-term focus that “private-equity” style structures can encourage.’
I’m with Thames Water and have just paid a (for me) eye watering (no pun intended) bill.
here’s from the London Evening Standard:
‘Thames Water was accused of “ripping off the taxpayer” this afternoon after revealing it did not pay a penny of corporation tax last year.
It also got a £5 million Treasury rebate in the financial year when it made £549 million and hit customers with a 6.7 per cent increase in bills.
The details emerged on the day that the head of industry regulator Ofwat said that the profits and complex tax arrangements of some water companies were “morally questionable”.
Thames Water, owned by the Australian company Macquarie and a group of investment funds, said the elimination of its tax bill last year was the result of capital allowances on its £1 billion a year investment programme.
I might get a letter to the CEO about this one. If air could be privatised it would be and we’d all be queueing for oxygen cylinders.
“In the complex offshore ownership of some [water] companies, a good number use high coupon shareholder loans to improve equity returns from the regulated entity and apparently to reduce tax liability”
Well Richard, writing as somebody who has been (is) highly critical of you, I do think you’re on to something here. There is a line a research that can be followed through here. How much profit is being made but not measured in the UK because of excessive leveraging and excessive interest on that debt? Has HMRC ever examined these arrangements – which according to the regulator are happening on across the industry – as an industry-wide proeject? Does it match its resource to risk at all? If it has done so, or if it did, would there be any profits made anyway, bearing in mind the high capital investment and high CA claims?
All good questions, all quite difficult questions.
There is no risk in water – they are guaranteed the right to make money
Why haven’t Hmrc challenged the interest deduction on transfer pricing/Thin cap cap grounds – they have the power and the regulations to do so?
Quite. I think this is the main point – either international rules need to change or we need to bulk up HMRC’s resources (chiefly, its staff) – preferably both. I don’t actually think there is much wrong with the arm’s length principle – but it doesn’t work if all that’s happening is that accountants are rubber-stamping inter-company arrangements. Unfortunately, I don’t think HMRC currently has the resources to challenge most arrangements.
For me, Richard, an issue of equal importance is the last line of the quote: ‘We have not yet found a regulated water company that fully complies with the UK corporate governance code or satisfactorily explains why not.’
This shows the weakness of the regulatory system, which, incidentaly, is replicated across all regulated (i.e. ex-public sector) organisations in the UK, the failings of which would shock most people if they understood them. This falls both ways. First the regulatory system (scope, rules, etc) was fixed at a level that is far too weak to make regulation effective. That was, of course, because of the ‘light touch’ obsession of succesive governments and the lobbying of the various industries. But secondly, serious questions need to be asked about the commitment to regulation of many of those who staff regulatory organisations. In many cases it would appear that even where powers exist to do certain things there is a significant reluctance to use them.
But equally important, I know from work I undertook last year, that it illustrates how fake – or, at the every least, questionable – many companies’ commitment to voluntary codes for corporate, ethical and environmental standards are. Lots of PR (and thus, money) goes into promoting the fact that organisations subscribe to or sign up to these. But rather like the attitude to taxation that is now exposed on an almost daily basis, when it comes to growing the bottom line and/or the paypackets of senior execs, that commitment soon withers, particulary in places where oversight and regulation are weak. There are notable exceptions, of course, but rather like taxation, the presure to join the race to the bottom is ever harder for committed, ethical companies to resist.
Put simply, in a world in which the power and influence of multi-nationals and the feral rich has created a feral economy overseen by increasingly compromised and complicit governments, any voluntary code and/or any regulatory system designed in the last two decades is no longer fit for purpose. This needs to be recognised and acted upon as currently these systems simply act as yet more mechanisms to allow the few to fleece the many.
I agree – but i can’t see this happening until the situation worsen’s significantly so that social unrest is waiting in the wings.
That’s right now! It’s gathering. I’m watching the rioting in Turkey today wondering how long it’ll be before it’s happening here. It’s not for nothing the government are considering investing in water-cannon!
The PRISM system will certainly come into its own if and when that happens, Simon. As Daniel Ellsberg (of the Vietnam papers fame) made clear in The Guardian yesterday, no group like that would now be free of instant surveilance and resulting persecution. Indeed, we know that in the UK lots of pretty innocuous protest groups have routinely been labelled ‘domestic terrorism’ – as indeed will Richard’s blog if we continue much further down the road to the neo-feudal state (or if he makes a nuisance of himself at the forthcoming G8 event). 🙂
Thanks Ivan!
I’ve promised I will be well behaved
Chief executive of Thames Water received income of £425000 + bonuses of over £400000 two years ago – how can this relate to any real human level of productivity? Surely you need a 90% tax on anything above 150000 for this to make sense. Of course if we did tax like that we’d leave and we’d all be using food banks because of the loss of wealth and services would be cut because of tax losses – wait a minute – we are…..
I have realised that the moral bankruptcy that the bankers were accused of post the financial crisis is really not just an issue for them, but is a disease at the core of most business in this country, from small tradesmen business trying to rip you and the tax authorities off, to large businesses doing the same.
Perhaps it’s inevitable due to the structure of business. The higher you rise in it the more power you have over men’s lives and so the less they’re inclined to disagree with you in case you abuse your powers and wildly disrupt them life and that of their families too. Normal societal checks and balances, which serve to keep us all grounded in reality and give us a sense of proportion and perspective, cease to function in such circumstances and these circumstances are typical of what we think of as normal everyday life. Our business leaders end up largely detatched and insulated from reality as a consequence.
“I’m with Thames Water and have just paid a (for me) eye watering (no pun intended) bill.”
Leaving aside the legitimate concerns over their tax strategy, I suspect most TW bills average £25-30 pcm. £1 per day for all one’s water needs is hardly eye-watering. I find water is the best value utility there is.
That really does depend on your income, doesn’t it?
For some it is a minor direct debit
For others a massive sum
I do not understand. Okay, so Starbucks can wriggle out of paying tax by saying they do not make a profit, bring all the coffee in from abroad at exorbitant prices, etc., as can Amazon, but water is water. It rains in Britain, it’s held in vast reservoirs in Britain, it’s filtered and purified in Britain. It’s used in Britain and paid for in Britain.
I know Thames Water is owned by an Australian company, but come on. If we can get water companies to pay taxes on their profits, we should be able to sort out the rest of the mess.
The alternative, as I see it, is to put VAT up and collect the taxes that way. Or stop companies reclaiming VAT and keep it in the system.
Naive, or what? I just do not see how water companies can get away with it. They are laughing at us ordinary people who pay taxes.
‘Get away’ with complying with the law? As RM said – this is legal & it is a matter for discussion and debate whether the law Thames have complied with needs to be changed.
So – why not ignore the law, write down what you think Thames should pay (remembering that companies don’t actually pay tax, it falls on either their customers or shareholders)& that’s it. No need for these complicated laws, you know the correct amount & they must pay it on pain of……
Well, you get incidence wrong
So I think I’ll ignore the rest
Water company cash tax is actually a cost that IS directly borne by customers because that is how prices are set by the regulator. This not true for all companies but it is for some price regulated ones, so in fact customers benefit from capital allowances in this case, although they won’t realise it
Evidence please – with links
OK so just reading some of the press coverage it seems the main gripes on tax are Thames didn’t pay tax becasue: a) they invested in assets and claimed capital allowances; b) they paid interest on intercompany loans of £328m.
Re a), Capital allowances isn’t tax avoidance as far as I’m concerned – that’s just the way the tax system works for business – In fact all business including my mate the plumber, and the guy running the corner shop can an undoubtedly do claim capital allwoances.
Re b), they may be highly geared and that interest may be high (I can’t comment on that) but it seems the interest is paid to UK tax paying companies who apparently pay tax on that interest so Thame’s are saying there’s no net loss to the UK exchequer becasue of that interest. That sounds logical and if so then I can’t see what the fuss is about. Unless they’re blatently lying and the companies receiving the interest don’t pay UK tax – But lying would seem to be an incredibly stupid thing for Thames Water to do, so I’m inclinced to believe the statement.
There may be a lot of other issues around what Thames Water do, but it doesn’t seem to me that UK tax in this instance is anything to focus on.
As far as I’m aware at least some of the recipient companies are not in the UK
It is entirely legitimate to say that the capital allowance regime is too generous
Well ok 17m was paid overseas to their Australian holding company. Big deal. With tax in Australia being 30%, that’s not exactly tax efficient tax planning games they’re playing.
And I’m not sure the capital allwoances regime is that geneorous is it? For most long term investment (i.e over 25years life which surely theirs is) you only get 8% a year on a reducing balance basis. Far less generous in the long run than many countries where they allow commercial deperciation as deductible. But I grant you it does give betterbenefits in the early years.
The reducing balance basis is an unfortunate relic of an old tax system based on paranoia of the tax authorities. I think many businesses would prefer tax depreciation to follow accounting depreciation, but I can’t see HMRC / the government doing that any time soon because of transition problems and I suspect fear that any transition rules will end up with loop holes that will get exploited. If they had confidence in their ability to draft robust rules (some form of GAAR maybe?) then that ought not to be an issue, but I really can’t see it happening.
I think you may find a great deal more left the UK than that from what I last saw
Evidence please – with links?
The statements were of opinion
http://www.ofwat.gov.uk/pricereview/pap_pos_pr09method080327.pdf
Page 10 diagrammatically shows tax as one the costs that is recovered from revenues under the regulators price setting methodology.