Coffee House

Water companies’ tax dodging is beyond the pail

13 September 2013

Since 2010, the average household water bill has increased by 14.5 percent. Indeed the average family has seen their overall utility bills rise by £384. Yet while jacking up our bills on the one hand the water companies have been indulging in serious levels of tax avoidance on the other.

Over the past three years, a number of utility companies have used tax avoidance schemes – based on debt tax relief – which has substantially reduced their tax liabilities. Companies like Yorkshire Water and Thames Water. My study demonstrated that this tax avoidance has potentially cost the Exchequer almost £1 billion in the past three years. In my view industrial scale tax avoidance of this nature is unethical, unacceptable and irresponsible.

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It is unacceptable because water is both regulated and a public service monopoly. They don’t use their tax avoidance proceeds to increase investment as they like to claim. Investment has in fact been falling. The regulator, OFWAT, should immediately launch a review into these practices and order the tax avoiders to cut water bills.

It is unethical because the companies concerned get tax relief twice for the same investment. They first get tax relief on the investment from capital allowances. Then, as they make around 80 percent of the investment through debt, they get tax relief on the interest payments. The rates of interest charged may be well in excess of normal market rates, increasing the amount of tax avoided. Invariably the debt and share equity is provided by the same overseas investor, increasing investor returns. Often the investor is a non UK pension fund providing the debt through the Cayman Islands tax haven. For this reason, HMRC should launch a review into these practices and consider what action can be taken.

It is irresponsible because these companies have become heavily indebted in order to make their tax avoidance work. Typically the debt levels are 80 percent or more. A few are near 100 percent indebted on some measures. Excessively high levels of debt plunged our banking system into crisis and required the banks to be bailed out. Like banks, we cannot have a situation where our water companies are allowed to fail. Unlike banks we are not yet at a point of crisis and we should act now to ensure that the irresponsible behaviour of water companies doesn’t end up requiring a bailout in future. OFWAT as the regulator has a responsibility to ensure that our water companies are stable and sustainable. That they are able to finance the investment required to modernise our water infrastructure. Basically to ensure there is no risk they will go bust. This is why OFWAT needs to stop the culture of excessively high borrowing in the water industry.

Tax avoiding water companies should be ordered to cut their bills. Yet the water industry needs to improve its corporate culture too. It needs to have a greater sense of social responsibility to the tax payer and the customer. The industry needs to reduce its sky high debt levels and operate in a safer way, not live life on the corporate edge. The bottom line in that water is an essential supply and the industry needs to operate in a low risk way.

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  • Mynydd

    Welsh Water is a not for profit company, and seems to have enough money to develop the system. Maybe other water companies should operate in the same manner, at least there’s no rip off profits to send overseas.

  • Alex

    “For this reason, HMRC should launch a review into these practices and consider what action can be taken.
    It is irresponsible because these companies have become heavily indebted in order to make their tax avoidance work.”

    OK, so the article is claiming that HMRC and our politicians have designed a corporate tax system that incentivises debt.
    So HMRC and our politicians are imbeciles.
    And the answer is to penalise companies?
    Isn’t it better to
    a) Have brighter politicians – i.e. ones who are economically literate
    b) Have brighter civil servants – i.e. ones whose pay and pension is heavily dependant on performance
    b) Simplify taxes and reduce headline tax rates

    • starfish

      Nah. Better to fulminate against the eeeeeeeevil youtilliteeees they are derty foreigners too donchano

      • Colonel Mustard

        Fulminate against them both. The FUBAR of the UK is now holistic as well as ballistic.

  • Toby Esterházy

    Blame immigration and not enough new reservoirs, not the water company.

  • itdoesntaddup

    If the money were being siphoned into a UK parent it would matter little whether the subsidiary or the parent was the entity that paid tax.

    Perhaps the real scandal on water is the EU Water Directive. Nice to have a pop at the tax avoidance industry, but EU rules dominate the increase in our bills. The Directive requires that regulators increase water charges and discourage investment in fresh supplies: we’re supposed to be metered (at considerable expense) and rationed if high prices don’t do the trick.

    Both problems have a common solution. Can you guess what it is, children?

  • mrsjosephinehydehartley

    O dear.On the face of it, these types of organisations are charging taxpayers both ways. Once for the water and again for the tax debt relief. Set ups like this might seem all very beautiful on paper but whatever it is they do in reality, is just not worth the cost..

  • Jackthesmilingblack

    For several years my water supply pressure in Oxfordshire was inadequate, such that i had to install four large tanks in the attics which would fill at night. Those Muppets at Thames Water replaced a huge water pipe system at great expense, only to find that it was a log on the old network that was the root of the problem. Because they`d got rid of the “old timers” they had no idea where the old pipe network ran.
    Jack, Japan Alps

    • Toby Esterházy

      It would had been a nice story if it were true, but it wasn’t.

      • Jackthesmilingblack

        Envy is a terrible thing. It can turn a shallow inadequate loser into a damaged, deranged, pathetic basket case with obsessive compulsive personality disorder issues almost over night.
        So have a good night`s sleep. You`re going to need it.

        • Toby Esterházy

          The attics of most British houses are not built to withstand the weight of water tanks.

          Who is envious of a terrible as well as hopeless liar being also a self-confessed schizophreniac?

          • Jackthesmilingblack

            The places I’ve lived, the houses and cars I’ve owned, the motor sport experiences, the entrepreneurial experiences, the writing work, the countries visited, the trips taken.
            As example the overland route across Russia from London to Yokohama in 1970 … It’s hard to be humble when you’ve been where I’ve been and seen what I’ve seen. And I’ve only just scratched the surface.
            Most risk-averse losers given to jealousy would mumble, “It’s totally undeserved”, but not Mad Jock MacDonald. He must compare my achievements and experiences only touched upon, with his sad unremarkable life and be literally consumed with envy. So his way of squaring the circle is to maintain, “It’s all a fantasy”. Well hard cheese Jock, it isn’t. I call him an insane liar when he claims I am
            Japanese, and can so easily prove justification. I just have to walk through the door for his credibility to be round his ankles. While in his case it’s libel. Pure and simple. His best move would be to claim diminished responsibility. Who would doubt it for one moment? I imagine the local Job
            Centre has his number when it comes to job placement. Unemployed and unemployable: File 13, the Nutter category.

            Jack, the Japan Alps Brit

            • Toby Esterházy

              Utterly irrelevant to the current discussion, as per usual. You had either lived in Oxfordshire and “installed four water tanks in the [attic]” or you hadn’t. You are just an annoying old Troll, a pest and a nuisance.

              The Soviet Union was a closed Country in the 1970s, and anywhere East of the Urals, like parts of India and Nepal and the Chinese side of the Tibetan border and certain Tibetan areas to-day, required a closed area permit. Your supposed travel was both completely unproven and uncorroborated.

              There is no such thing as a “Japan Alps Brit”, any more than there was a “Spain Brit” or a “Portugal Brit”.

              • Jackthesmilingblack

                The Spectator? Isn`t that the weekly magazine with the deranged cyber stalker that assigns anyone he disagrees with an alternative race and nationality?
                Seriously Spectator, providing a forum for a person with this level of mental health issues must surely compromise your reputation as a serious publication.
                Jack, Japan Alps

                • Toby Esterházy

                  Having been to a fee-paying boarding school in Oxfordshire (or even Sandhurst) in the 1990s does not by the fact alone make you a British subject.

  • dalai guevara

    When Benedict Cumberbatch get to take off his fire fighting oufit, could he return to the script of the Assange movie please? Otherwise, there will be competition.

  • HookesLaw

    The water industry is regulated. People may think OFWAT is doing a good or a bad job, but prices are regulated.
    Since privatisation the water industry has invested about 100 billion. Twice the rate pre privatisation. It borrows a lot of money and its in the customers interest that it does so at reasonable rates.
    It is not clear to me that there is any comparison between utilities actually making profits and banks suffering bankrupting losses due to bad loans.

    My understanding is that the rate of return investors expect for water utilities is 5%. This is not extortionate.
    My further understanding is that the tax issue with utilities is that they make interest payments to other group companies and avoid tax that way. its this to me which should be looked at for all companies (I think it is) and not the aunt sally of water companies.

  • Colonel Mustard

    The ordinary working British public is like a tethered animal from which a succession of ever increasing bloodsucking entities, home grown and foreign, gorge. Their fortitude and resilience to relentless exploitation is remarkable. That pack of treacherous parasites in Westminster who were and are responsible should have long been consigned to a richly deserved fate.

    • HookesLaw

      Go out and dig a well then and dispose of your own sewage.

      • Colonel Mustard

        A silly rejoinder even for you, since the issue in debate is not the mechanics of how water is provided and sewage disposed of but who manages the mechanics and how it is charged for.

        You presumably enjoy being regularly ripped off and “talking” to utility companies through a succession of telephone menu hurdles as a benefit of the “free” market.

    • dalai guevara

      Remarkable, Colonel.
      No use of double entendre in your post. I might have to recommed you for this.

  • Smithersjones2013

    The behaviour of the water companies is particularly venal. Of all the privatisations it is probably the greatest failure. Elphicke perhaps should take ownership of that failure for his party. It was their error. The idea that these regional monopolies demonstrate the free market thinking as was claimed at the time was risible.

    However, its a bit rich that such complaints are coming from an MP whose own constituents have to suffer water charges from two seperate companies and are royally screwed by them twice over. The people of Kent by and large pay almost double what most other areas pay in water charges. It’s a disgrace. So why doesn’t Elphicke do something to impress the voters who he needs to keep him in his job rather than posturing on Coffee House?

    Furthermore he might explain why this government cancelled two or three new water capacity improvement projects despite the population continuing to rise rapidly, there being periodic water shortages and persisted with the EU ‘guidance’ that increasing capacity should be avoided and only be carried out as a last resort and that rationing (which hose pipe bans effectively are) is preferable.

    Frankly we should stop sodding around with these parasite water companies and make it clear if that do not sort their act out very quickly they will be renationalised and paid bottom dollar for their investment. No longer can we tolerate the abuse of utility (and energy) companies whose attitudes (they think they can dictate terms) are not dissimilar to the actions of the trade unions in the 1970’s and 1980’s. In which case their involvement in our society should be curtailed just as the unions involvement was.

    PS Tax Avoidance is LEGAL. Therefore if it has cost the Treasury £1 Billion more fool George Osborne’ Treasury for allowing the practices to continue! When are the political underclass going to cease hiding behind these transparently crass ethical and moral postures when it is in their power to block the loopholes being abused and recover the funds (through other means) such as the Budget and supporting legislation. Enough with the procrastination. DO SOMETHING!

    • Russell

      I totally agree the water companies should be Nationalised, and as a life essential (unlike letter/parcel postal service) service should never have been privatised.

      The people of Kent have reasonable water/sewage charges compared to us here in Devon!

      Standing charge £34.18 per year for water supply
      Usage charge £2.0494 per m3 for water supply

      Standing charge £30.32 per year for sewage charges
      Usage charge £3.4701 per m3 for sewage charges

      • HookesLaw

        Do you really think your tax bills water bills and the countries borrowing would have been better under a nationalised system?
        Do you really think the investments would have been made?
        Do you think there would have been 100 billion instead of 50 billion investment with a nationalised system?

        • Russell

          The people paying for the ‘investment’ have been and still are the customers, while the shareholders get increasing dividends and the executives £multi million deals!
          What other business can charge customers increased amounts year on year to provide themselves with an improved service which they then charge more for? It’s a con, the same as energy companies.

        • Colonel Mustard

          Where does the competition come in? Customers are a captive audience – a cash cow.

  • HurstLlama

    The other side of the water companies’ financial story is the level of dividend payments. This seldom seems to get a mention and I don’t know why. In a nutshell, despite making losses (so they don’t have to pay tax) they seem to be able to send vast sums home to their, mainly, overseas parent companies in dividends. Thames Water, I think, is particularly outstanding in this respect.

    • David Lindsay

      Thames Water is owned by the Australian bank Macquarie, and it is now demanding that the British taxpayer hand over four billion pounds for a new “super-sewer”. Yet it has has drained off huge profits and imposed rapidly rising prices.

      What were once our water companies are two thirds foreign-owned, and are subject neither to government regulation nor to market restraint. Public ownership, people. Public ownership.

      Then, among other things, we could have the National Grid for water that was first proposed in the 1970s, and which Simon Heffer and Peter Hitchens now favour. The latter implicitly, and the former explicitly, now favour renationalisation.

      • HookesLaw

        It came out with less sh!te we would not need a new super sewer!

        It is not of course Thames Water that wants the sewer – its us that need it.
        According to our friends over at the Daily Mail Thames have made £1.7 billion profits over 5 years. Thats £340 million a year. Nice work if you can get it but not eye wateringly extravagant on their turnover (£1.7 billion) and their investment levels.

        RBS made £800 billion in the last quarter alone.
        BMW’s first quarter profits were £1.1 billion
        Marks and Spencer’s profits fell last year – to £564 million.

        That is not to say that it should not be paying some corporation tax. As we all know – big companies and small time comedians did not pay tax under labour. This govt is putting it right.

        Is Hitchins now taking his rambling tour round his pick n mix of ideologies back to socialism?

      • HookesLaw

        And Thames Water was sold when under the auspices of a Labour government. Thames Water was sold for £8 billion. If its profits are or were about £400 million than the return on that investment is a giormous 5%.

        • David Lindsay

          Thames Water was sold when under the auspices of a Labour government


    • HookesLaw

      They make profits, its the way they use them that attracts less tax.
      The govt are doing something about it all

      I expect we will see more of this in future budgets.

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