Sunday 16 June 2013
Cash draining away – how the water industry avoids tax
These foreign-owned companies make enormous profits, but pay hardly any tax
When David Cameron chose to put global measures to halt cross-border tax avoidance at the top of tomorrow’s G8 agenda, instead of thinking just of Google and Starbucks he should perhaps have been concentrating on a scandal much nearer home – the peculiar game now being played by much of Britain’s largely foreign-owned water industry.
Two events last week lifted part of the veil on this lucrative racket. First was an extraordinary article in the business pages of The Daily Telegraph by Jonson Cox, chairman of Ofwat, the water-industry regulator, which recognised that the industry’s “excessive profits” and tax-avoidance schemes, with water charges rising by up to 11 per cent a year, were “morally questionable in a vital public service”. Then came the annual report of Thames, our largest water company, showing that, on profits of £550 million, it had paid no corporation tax at all, while giving its chief executive more than £1 million. Thames insists that its tax is only deferred, not avoided, because it invested £1billion on capital projects, although its critics point out that this did not include mending leaks, for which it has a notoriously poor record.
This is far from untypical of an industry now averaging profits of 30 per cent a year, and much of which in recent years has been bought up by an array of mysterious private owners registered in overseas tax havens. One firm, Northumbrian, for instance, is indirectly owned by a Chinese businessman said to be the ninth-richest person in the world, whose holding company is registered in Bermuda. Others are owned by financial interests based in Singapore, Malaysia, Canada and across the world. Four of their CEOs earn £1 million or more a year. Yet, despite their colossal profits, many firms contrive to pay little or no tax.
How the tax dodge works is that the companies borrow billions from their shareholders, via tax havens (and often in tax-privileged “Eurobonds”), the interest on which they can offset for tax purposes against their profits in the UK. Because the shareholders then receive the interest, plus their hefty dividends, in places such as the Channel Islands, Cayman Islands and Bermuda, they pay little or no tax on these either. All this is financed by the rest of us through our ever-rising water bills, under an arcane charging structure agreed by Ofwat, which, as Mr Cox admitted, allows them not just to cover their spending on capital investment, but to claim borrowing costs more than twice the normal rate, plus very generous allowances for inflation.
It is hardly surprising that our water industry has become such a magnet for canny financial operators from all over the world. When water was privatised in 1989, the state having taken over dozens of local, largely municipally-owned water utilities under Edward Heath’s Water Act in 1973, the idea was that the industry would be run by dedicated public companies in which we could all become shareholders. Ofwat was set up to protect the interests of consumers, while allowing the new companies “a reasonable return on capital”.
But in recent years all but seven of our 19 companies, each enjoying a local monopoly, have been sold off into the private ownership of this multinational array of financial concerns, for whom British consumers and our tax system have become helpless milch-cows. (For a factual report on much of this, see “Leaking away: the financial costs of water privatisation” at CorporateWatch.org.)
Last year, the UK tax authorities proposed closing the “Eurobond” tax loophole that exempts shareholders from having to pay a 20 per cent withholding tax. But this was abandoned. The only real hope of ending the regulatory failure that allows this state-sanctioned theft to continue must lie in concerted action between the Government and Ofwat. Yet the draft Water Bill shortly to go through Parliament proposes only that the financial constraints imposed on the industry by Ofwat should be further relaxed.
What top tables, Mr Cameron?
As David Cameron leads his fellow G8 members to their meeting in a Northern Irish bog, he tells us how important it is that Britain remains at the international “top table” through our membership of such bodies as the World Trade Organisation (WTO), the UN and the EU. What he doesn’t tell us is that, at the WTO, we no longer have a place at the table at all.
Because trade is now an exclusive “Brussels competence”, our seat there has been taken by the EU. We still have a seat on the UN Security Council but there too, like France, we now have to represent an EU “common position”, so first we must check with Baroness Ashton’s EU External Action Service to ensure that we don’t speak out of line.
As for that “top table” we enjoy in the EU itself, if it comes to a difference of opinion we have only 8.4 per cent of the votes, so we hardly have much clout there unless we agree with most of the other 27 members.
What Mr Cameron also doesn’t mention is all those other international bodies on which we no longer have a seat, as we have had to surrender our place on them to the EU. As the former owners of the world’s richest fishing waters, for instance, we used to sit on the North East Atlantic Fisheries Commission, which ultimately makes the rules for those waters. But there, too, we have been replaced by Brussels.
The same is true for the global body that decides all the standards for vehicle manufacture. Although we have one of the largest motor industries in Europe, it is now only the EU which speaks for us. But Norway, with a successful fishing industry but no motor industry, sits on both these bodies in its own right.
If Mr Cameron really wants to sit at all these top tables, he could get the best of both worlds by joining Norway as an independent country which enjoys full access to the EU Single Market. But he prefers to stay a member of the EU, clinging on to his fading dreams as our influence continues to ebb away.
Energy targets are mind-boggling
I must apologise for an error in last week’s item on the Energy Bill, where I said that, through a Government amendment, we were now committed to reducing our electricity use by 27 per cent within six years and 40 per cent by 2030. Although it was not exactly clear from Hansard’s report on the debate, this was not in fact a Government amendment and was not put to a vote, so those improbable targets were not part of the Bill approved by the House.
Greg Barker, the minister for energy and climate change, did, however, say that “in principle” he approved that amendment, which only sought to make a statutory requirement of what the Government is hoping to do anyway. It is clear from a report published last November by his department that these mind-boggling targets are very much part of its thinking as to how we might “decarbonise” our electricity supply.
What is proposed in this report, “Capturing the full electricity efficiency potential of the UK”, is that we should aim for almost exactly the reductions in our power use proposed in the withdrawn amendment. But it is also clear that one reason why the Government was content to see the amendment disappear is that it hasn’t got any idea how such targets could be achieved. The report includes a ragbag of proposals, such as that we can all make a 31 per cent reduction in our home electricity use through better insulation, and 20 per cent more by switching to low-energy light bulbs, which are pure wishful thinking.
Such is just part of the suicidal cul de sac we are being led down by our Climate Change Act obligation to cut our emissions of carbon dioxide by 80 per cent within 37 years: a target that cannot possibly be met without closing down most of our existing economy.Š Having observed many times here how outrageous it was that Tim Yeo MP could continue to act as chairman of the energy and climate change committee while earning £200,000 a year for advising various green-energy firms, I noted with interest that he has at last been forced to step aside after being caught in a newspaper “sting”. But I also note that his successor as chairman of the committee, a Lib Dem MP called Sir Robert Smith, is recorded on the website They Work For You as being a “very strong” supporter of measures to halt climate change. It must comfort the Government to know that the committee is still in safe hands.#
=====================================
=====================================
Ofwat may have persuaded taxman to look again at Eurobonds
Jonson Cox didn’t name any water companies when he questioned the morality of some utilities’ tax-reducing structures in the Telegaph on Monday.
9:25PM BST 10 Jun 2013
But, with Thames Water unveiling full-year profits and revealing that, once again, it had paid no corporation tax, it was no surprise that Britain’s biggest water company felt the heat from the Ofwat chairman’s comments.
Thames argues its corporation tax bill was reduced in large part due to tax relief relating to its investments, a quite legitimate tactic. Mr Cox did not raise any qualms with such tax relief, and nor do we.
As even shadow Chancellor Ed Balls has admitted, there can be “good reasons why companies pay little tax”.
Mr Cox’s beef was with companies reducing tax payments by the use of shareholder loans. Thames uses a Eurobond with an 11pc interest rate as one way of passing profits up to its shareholders. Unlike dividend payments, the £17.5m it paid as interest on the bond this year is tax-deductible.
As Mr Cox himself conceded, such loans are perfectly legal. But opting to use structures that reduce tax payments in the UK may grate with Thames’s 14m customers facing rising bills.
Mr Cox’s assertion that the structures are “morally questionable” is, however, unlikely to persuade Thames Water into voluntarily stopping using the bond, especially given its customers cannot vote with their feet.
It would also be surprising if Mr Cox found a way to end the use of the bonds through Ofwat, whose remit does not include tax policy the last time anyone checked.
Nevertheless, his intervention may achieve a number things.
It may lay to rest any niggling doubts about where Mr Cox’s sympathies lie. He may be an industry veteran who benefited handsomely at the helm of two water companies but he has shown he is nobody’s patsy.
It may also help him to force utilities’ hands on other areas that do fall within Ofwat’s domain, such as improved transparency and governance.
It might also focus minds in government, whose domain tax actually is. HMRC last year considered closing a tax loophole over the use of Eurobonds, which it estimated could have netted the Exchequer about £200m a year. It backed down in the face of industry lobbying.
If an industry heavyweight such as Mr Cox thinks they are morally questionable, the taxman might decide to take another look.
Posts
