Water companies cannot be compared to multinationals on tax avoidance issue, says expert

Heather Self of Pinsent Masons, the law firm behind Out-law.com said that activity criticised in  the Observer and Guardian newspapers was a "perfectly acceptable" use of existing rules.

Water companies Thames Water and Anglian Water paid no corporation tax on their profits last year while Yorkshire Water paid corporation tax of £2.9 million, according to reports in the Observer. The newspaper stated that "All the companies made hundreds of millions of pounds in operating profits and some have rewarded their senior executives with performance-related bonuses and investors with huge dividends".

The newspaper said that Thames Water "avoids tax by offsetting the interest payments on its debts against its tax liability and delaying it by claiming allowances on capital project spending".

A Thames spokesman told the Observer: "with nearly £1bn of deferred tax liability on our balance sheet, tax is being delayed, not avoided. We are structured in an efficient way in accordance with the tax system and the benefits from this flow through to Thames Water customers – in the form of £1bn a year of essential investment while keeping bills among the lowest in the sector. All of the Thames Water group's active companies are resident in the UK and pay tax to HMRC."

"The water companies are required to spend huge amounts on capital projects," said Heather Self. "They get capital allowances for this, they borrow to fund infrastructure investment and get tax relief on their borrowings and they use losses that have arisen in other group companies to offset their profits. None of this amounts to tax avoidance and is simply perfectly acceptable use of the existing tax rules, in the way that was intended by Parliament."  

"In fact, the UK is one of the least generous countries for giving tax relief on infrastructure projects - it ranks 19th in the G20 on this measure.  So companies do not even get tax relief on all their commercial costs - so far from avoiding tax, they are paying more than they should." Self added.

Simon Hughes, the deputy leader of the Liberal Democrat Party, has written to the MPs on the public accounts committee (PAC) to demand an investigation into the tax affairs of the water companies, according to the Observer. The PAC is investigating tax avoidance by multinational companies and yesterday questioned representatives from Starbucks, Google and Amazon on their tax affairs.

"The tax affairs of the water companies cannot be compared to those of the multinationals who were grilled on their tax affairs yesterday by MPs on the public accounts committee." Self said. "The water companies are not basing their operations in jurisdictions with favourable tax regimes; they are simply getting tax relief for money that they have spent, or borrowed to spend, on expensive infrastructure projects"

It emerged in yesterday's PAC hearing that Starbucks has agreed a favourable tax rate with the Netherlands tax authorities for the profits of their European headquarters. Troy Alstead, global chief financial officer of Starbucks, was not prepared to reveal the precise terms of the deal as he stated that the Netherlands tax authorities had asked Starbucks to keep this confidential.

Alstead was questioned aggressively by MPs, along with Andrew Cecil, the director of public policy for Amazon and Matt Brittin, the head of Google's northern Europe operation in a session lasting nearly three hours. 

In May the CBI published a report on making infrastructure investment attractive to investors. At that time John Cridland, CBI Director-General, said that “infrastructure spending offers the UK the elusive growth boost we are all seeking".

Heather Self said that it is likely that there will be an announcement in the Autumn Statement on 5 December on the Government's proposals for making infrastructure investment attractive to institutional investors such as pension funds.