UK WATER COMPANIES are using debts listed on offshore stock exchanges as a device to avoid tax, it has emerged.
Six companies – Northumbrian, Yorkshire, Anglian, Thames, South Staffs and Sutton and East Surrey water – have been accused of using tax havens to exploit a legal loophole in order to avoid paying tax.
According to the report by Corporate Watch, the companies collectively borrowed around £3.4bn at high interest rates from subsidiaries of their owners based abroad. The owners then received the payments tax-free, issuing the loans through the Channel Islands stock exchange, listing them as ‘quoted eurobonds’.
When UK companies pay interest to non-UK businesses, they normally have to withhold 20% of the payments and pass them to HM Revenue & Customs.
However, where loans are issued as quoted eurobonds on a recognised stock exchange, such as that in the Channel Islands, they are exempt.
Northumbrian Water was highlighted as “the most brazen case”, paying around 11% interest on about £1bn of loans from its owner, the Cheung Kong group, a Hong Kong-based corporation run by Li Ka-shing, the ninth-richest person in the world.
The Treasury and HMRC are believed to have considered shutting down the loophole last year, but opted not to, despite concerns over the the way in which companies were using it.
The report also found the debt accrued by the industry was costing the UK consumer £2bn more than it would if it were publicly financed.
That figure was reached from the difference the government pays to borrow money and the rates that the water companies secure on the international markets. In all, the companies accumulated debt of £49bn and paid more than £3bn in interest payments in 2012, as well as £884m in dividends. Total revenue in 2012 stood at £10bn, the report claimed.
The water industry insisted consumers receive a “good deal”. Cited in the Independent, the industry defended itself.
Director of economic regulation for trade body Water UK Paul McMahon said: “The tax framework has been put in place by the government and companies work within that regime. Clearly government debt is cheaper than private debt. But it’s not free and the public sector is inheriting the risk that comes with that.”
Anglian Water did not dispute the report’s figures but said it contributed “£150m in other taxes” to the UK economy in the past year.
A Southern Water spokesman said it was “undertaking a major capital improvement programme from 2010 to 2015. The spokesman added: “At £1.8bn, it is the equivalent of spending nearly £1,000 for every property in the Southern Water region over the five-year period.”
Northumbrian Water said it could not comment on the report until it had spoken to its shareholders. However, it argued that the figure for its tax payment was “unrepresentative” and that Northumbrian Water Ltd, one of the group’s operating subsidiaries, paid £30m in tax in the 12 months to 31 March 2012.
Thames Water accepted that interest rates had effectively wiped out operating profits, but said a tax credit received for 2012 came from “previous years” and that investment was at its “highest-ever” level.
Sutton and East Surrey Water told Corporate Watch it could not comment because it was “up for sale”.
South Staffordshire Water confirmed it had eurobonds in emails sent to Corporate Watch and also said it was investing heavily.
Ofwat told Corporate Watch it “does not have the power to prevent any change of ownership. However, following a change of ownership we consult on the ability of new owners to be the fit and proper owners of a regulated water company. We have made a number of amendments to the regulatory ringfence conditions in companies’ licences to ensure we regulate companies within larger groups effectively”.
Phillip Gershuny, senior tax partner at Hogan Lovells, outlines how a European exit could affect UK taxes
London accountancy firm Blick Rothenberg warns of potential damages VAT changes could cause UK businesses
Two PwC whistleblowers and journalist to stand trial over alleged leaking of corporate tax documents
Governmental pressure to crack down on tax evasion is resulting in HMRC applying its criminal investigation policy in an inconsistent manner, writes Kingsley Napley's David Sleight