And now the idiots are going after the water companies

The Observer can reveal that despite cutting its tax liability, by piling up debts, Thames has paid out £1.08bn in dividends over the past four years. It avoids tax by offsetting the interest payments on its debts against its tax liability and delaying it by claiming allowances on capital project spending. The company is seeking government support for a £4.1bn project to build a new \”super sewer\” under the Thames.

Anglian Water\’s cashflow statement for 2012 reports that the company paid no corporation tax on its regulated water business in the financial year ending in March. The company paid £500,000 corporation tax in the previous year and £1.4m the year before.

Anglian, which lent £1,609.1m to a subsidiary company in the Cayman Islands in 2002, paid £478.1m in equity dividends to investors this year, including its subsidiary in the tax haven. Yorkshire Water, which made an operating profit of £303m in 2012, paid £2.9m in tax on its water profits last year and £11.1m in the year before, having increased the debt on its books recently, which offsets tax payments.

So, the regulated businesses are not making a profit. After capital allowances and interest that is.

So, the water companies are not ripping off the consumer then, are they? They\’re covering the costs of providing the service and little else.

Then we\’ve got this idiot whining about those interest costs and capital allowances. Well, fools, how do you expect anyone to provide a few £billion\’s worth of infrastructure? You\’re not seriously going to demand that it\’s all paid for out of equity, are you? So, obviously, there will be some borrowings.

Indeed, don\’t we have the Murphmeister insisting that such infrastructure bonds will provide the perfect pension investments for the hoi polloi? Err, yes, I think we do in fact have him and Colin Hines claiming exactly that. So, we have it from the finest of sources that borrowing to build infrastructure is just absolutely ticketty boo. For of course if it\’s right and proper that people should lend to build such then obviously someone has to be borrowing to do such.

As for capital allowances: these compensate for the tax that is paid on retained profits. So they made £1 billion (imagine, made up number) in profit. In order to keep the sewers working they need to spend £500 million maintaining them. So, they take £500 million of that profit and plough it back into the business. The other £500 million they pay out in dividends to shareholders (largely, your and my pension funds).

That\’s OK. But we\’ve charged them 25% (close enough to reality for a made up number) corporation tax on those retained profits that they\’ve ploughed back into the business. £125 million in tax taken off what we want them to do, maintain the sewers. Capital allowances just compensate for that. That\’s all: it\’s a way of making sure that we\’re not charging tax on reinvestment.

Which is why Simon Hughes is an ignorant cunt:

Simon Hughes, the Liberal Democrat MP for Bermondsey, where machines are due to start their work gouging out the tunnel, has long been of the opinion that it is wrong that the taxpayer should even underwrite the risky project. Surely Thames Water could afford to bear all of the burden? Had it not put something away?

Hughes\’s digging into Thames Water revealed a byzantine accounting structure, with multiple companies, subsidiaries and an offshore site. He took advice from a former director of utilities at the European Bank for Reconstruction and Development, Martin Blaiklock, on the workings of the maze that was Thames Water\’s company accounts and others.

What he discovered was a system that he believes is letting down the customers and the taxman and one that appears to be repeated across the UK, where 75% of water companies are owned by private equity firms. The first part of the jigsaw is an annual bumper dividend paid to investors or to companies which are often their own subsidiaries, sometimes offshore, and which rip out funds that publicly owned waterworks might once have kept aside for infrastructure investment.

The very thing he is complaining about, capital allowances, is exactly what allows companies to retain and reinvest profits.

Ignorant, ignorant little man.

 

8 comments on “And now the idiots are going after the water companies

  1. Well the complaint is actually that a load of money is borrowed, paid out as a dividend, and completely by magic the entire tax bill from then on is magically erased on the interest on the money that was borrowed to pay shareholders.

    And half a billion squid is one hell of a dividend for a water company.

    I also observe that being thus loaded up with debt does not make it any easier to invest. If all a company’s profits are going on interest payments, you’d have to get any new money off the shareholders. Which rather ruins the point of the whole borrowing/dividend thing.

    I suppose you could eliminate all these avoidance schemes by making loan interest non tax-deductible, don’t know what unintended consequences that might have though. And it wouldn’t be straightforward to distinguish between borrowings done to avoid tax and borrowings done to spend on capital stuff.

  2. “Well the complaint is actually that a load of money is borrowed, paid out as a dividend, and completely by magic the entire tax bill from then on is magically erased on the interest on the money that was borrowed to pay shareholders.”
    That’s an interesting idea but is it correct? I suspect that if Eddy Ltd. borrowed a billion and then paid out half of it as a dividend the tax man might express a smidgeon of concern about such things. On the other hand if this works then my next posting here might be coming from a sandy beach in Bermuda.

  3. James

    The tax deduction for borrowing is of the interest, not the capital.. so the amount of interest paid will always be more than the tax paid.

    Debt finance is cheaper than equity finance, so it makes sense to use it. Part of that is because of the tax treatment (dividends are not tax deductible). There can be arguments made that the tax system over incentivises debt finance.. but, that’s how it’s designed so we shouldn’t be critical of those who ‘use’ that fact.

  4. So, the regulated businesses are not making a profit. After capital allowances and interest that is.

    So, the water companies are not ripping off the consumer then, are they? They’re covering the costs of providing the service and little else.

    There is the real possibility that they are just not very efficient. It is not relevant to this discussion, but it is entirely possible for water companies not to pay a dividend and yet still rip users off because they are so incompetent at what they do. After all, they never paid anyone anything when they were state owned.

    The management may also be helping itself to ever largely slices of the pie leaving investors and consumers with nothing as well.

    Not that I am saying either is happening here but with the water industry I wouldn’t be sure it isn’t.

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