Water Companies – Whose Tax Is It?

water-pipe-300x180Despite making operating profits in the UK of nearly £1.5 billion pounds between them, three foreign owned water companies seem to have been able to whittle away the vast majority of the rest of their profits so that the tax liabilities payable on them in the UK are minuscule in comparison. They are, however, still able to pay dividends to their foreign shareholders.  These revelations were highlighted at Monday’s meeting of the Public Accounts Committee (PAC).  Other substantial companies such as Starbucks and Amazon were also required to explain their low corporation tax bills to the PAC.

There have been no suggestions that the actions of these companies is illegal, so why is the public so upset about this and should they be?

It is clear that these companies use professional tax strategies aimed at mitigating their tax bills in whichever territory they arise and as an advisor to SMEs, this would not seem unreasonable given that my clients expect me to find planning opportunities to mitigate their tax bills. However, in my view this is not the problem.

The real problem seems to be that the vast majority of the UK earned profits of these foreign owned companies are in fact being exported to other territories. This may be the foreign parent’s home country or even countries known for their ultra low or zero tax rates. The mechanism used to export these profits involves the UK trading company being charged for a whole variety of legally structured but arbitrary costs, such as management or marketing fees,  royalty or license payments and finance charges etc, by their owners or companies connected to their owners. These charges then become the profits which are subject to tax in the owner company’s country of choice, such that the tax thereon is now not available to be circulated back into the country which created the revenue in the first place. There are, of course, tax laws which the UK authorities can use to stop the excessive exportation of profits; but, my personal feeling is that in this respect, the Inland Revenue do not bite as doggedly as say the IRS do in the USA.

In my view, it is reasonable to expect large companies, particularly public utilities that to some extent have a natural monopoly, to accept their responsibility to contribute to the tax burden in which their customers reside. By reducing their UK tax burden these companies do not contribute their fair share to the Exchequer thus leaving the rest of UK business, principally the SME business sector, to pay more than they should and in doing so reduce their own investment resources. I understand fully the need to entice foreign investment into this country and to enable foreign owners to recover any legitimate costs incurred by them for the UK company, but it seems to me that somewhere the balance and sensibility has been severely lost in the cases recently cited in the press.

On hearing the revelations, It is not surprising that the owners of SMEs, the customers of Thames Water and many other large foreign owned multinationals operating in the UK as well as the general public see the lack of tax paid by these companies as deplorable. I am also sure that they would all agree that the PAC are right to demand an investigation to understand and correct the failings in the UK tax system that prevents such avoidance from happening.  As a long time supporter of UK SMEs, I also think that the situation is deplorable and would like the situation remedied immediately.

Of course we must also be aware that the UK also has some very large multinationals who might be transferring profits to the UK out of their operating territories but as such actions are not quite “cricket” I suspect the UK may well be a net gainer from any corrective actions.

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