War on Want really are cretins aren’t they?

In 2007, Alliance Boots left the FTSE 100 by becoming a
privately held firm in Europe’s largest ever leveraged
buyout (LBO). The transaction was led by US private
equity firm Kohlberg Kravis Roberts & Co. L.P. and the
company’s Executive Chairman Stefano Pessina, a
billionaire resident of Monaco. The LBO was financed
largely with £9 billion in borrowings, more than 12 times
the company’s EBITDA (earnings before interest, tax,
depreciation & amortisation).
By taking on this level of debt, private equity-backed
firms like Alliance Boots have the potential to erode the
tax base in the country where they locate their
borrowings. Profits are, in effect, shifted abroad.

While Alliance Boots operates in 25 countries, largely
through its wholesaling business, its more profitable
retail business is mostly in the UK. Because all or almost
all of the LBO debt was located in the UK, Alliance Boots
has been able to deduct its finance costs from taxable
income in its most profitable market. During the
six-year period since the buyout, we calculate that the
company was able to reduce its UK taxable income by an
estimated £4.2 billion compared to what it would have
paid had it not carried any debt, resulting in a tax bill
reduced by an estimated £1.12 to £1.28 billion in taxes.

There is no evidence whatsoever that the tax bill has been reduced by one red penny. It could actually have increased.

It is true that profits are taxed at the company level. Interest paid is taxed at the level of the recipient. That the company is no longer paying tax on profits means, here, that the recipients of the interest are paying tax on that. There is thus no, I repeat absolutely none, evidence that the total tax bill has gone down.

16 comments on “War on Want really are cretins aren’t they?

  1. But beforehand, all Boots’ corporation tax was paid to the UK exchequer; whereas now it’s going to various governments around the world, depending on who owns the bonds or loans. In War On Want’s view, they’d rather the money stayed in Britain where it could be spread around to the needy poor (or at least to third sector do-gooders).

  2. They are a government funded propaganda fakecharity.

    They don’t need no steenkin’ evidence to get airtime on the BBC government funded propagandists.

  3. Boots has been in financial difficulties for years. If they didn’t take steps to reduce their costs, and ended up another going out of business like Woolworths or Comet or so many other bygone retailers, how would the thousands of newly unemployed pharmacists and checkout girls and warehouse men represent a victory in the war on want?

  4. “That the company is no longer paying tax on profits means, here, that the recipients of the interest are paying tax on that.”

    Sorry if I’ve missed something, but do you have any evidence at all that the recipients of the interest are paying tax on it? Not that they might be, but that they are actually paying?

    What if they are UK pension funds? Or people holding a corporate bond fund in an ISA? Or residents of Monaco? Charities?

    All sorts of bods could receive the interest tax free, perfectly legitimately. So probably less tax is being paid than before it was geared up. (What that has to do with War on Want is another question.)

  5. Not sure if I’ve got this right, but

    If corporation taxes were lower, firms would have less incentive to lower their taxes through higher gearing. Low gearing = a more robust business (in case of external shocks) so more employee security, so more consumer spending, so more taxes.

    So War on Want should logically be lobbying for lower (or none) corporation taxes.

  6. It is always amazing that these airheads miss the one and only tax dodge behind Boots.

    By moving the company’s headquarters to Switzerland, Pessina and the London-based partners of KKR are saving themselves all and any capital gains taxes on their investment (and carried interest in Boots).

    Pessina is Italian, KKR’s London operations are run by a German and the senior deal partner is Irish. All of them are non-domiciled UK tax residents and will not pay any tax on the un remitted profit from the investment.

  7. how do the numbers work?

    say I was making £100m profit and paying £30m annually in corp tax and I then do some capital restructuring to I now have £100m of interest to pay and make zero profit and pay zero tax, are those in receipt of my £100m in interest payments going to pay anything like £30m on it? I don’t see how they would be, it’s not as if they’re making £100m of profit just because they are receiving £100m of interest income.

    what am I missing? Because it looks to me like the quantity of tax paid is going to fall.

  8. HMRC/HMG/OECD are aware of these issues, it’s why we have ‘thin-cap’ rules. We also have X-fer pricing to counter excessive rates of interest.

    But Alliance-Boots has a wart on its nose and so MUST be a witch.

  9. Luis Enrique: the interest is profit, yes.

    Whether they pay tax of £30m on it is another matter, which depends on where they are.

    If it were all purely in the UK, then there would be no tax loss: the interest deduction in the UK would be exactly matched by taxed interest, and the tax Boots saves would be recovered from the creditors.

    If ti goes cross-border then tax could be higher or lower. It’s unlikely to be higher, simply because if you get a choice then you go for lower not higher. But the tax loss is then because the overseas jurisdiction charges a lower rate, not because Boots have done anything tricky.

  10. They may, of course, have made a profit on the deal and a loss on the year, wherever they are, and so they wouldn’t pay any tax. But that is another matter.

    They would not be dodging tax, they would be losing money.

    It’s a strange world where companies that buy companies only do so to avoid paying tax in the UK. I would have thought they thought they could turn it round, flog if off to a third party, asset strip it or something to get the value out of it. Paying millions to avoid paying tax for a lesser amount doesn’t look like much of a business to me.

  11. Pellinor

    what? suppose the debt is with a bank. A bank’s gross interest income equals its taxable profit? I do not think so.

  12. No, but that specific bit of interest income will be profit.

    The exception would be if they’ve had to borrow in order to make the loan, in which case the interest payable on that loan will be deductible from the profit to get the actual taxable profit. But all you’ve done there is push the question back to whoever lent them the money: at some point you’ll get back to the ultimate investor, in whose hands the interest is profit.

    I’m ignoring the costs of running the lending business, of course, so you do have a point, but the costs (apart from interest) will be small compared to the interest received so I think ignoring them makes no significant difference. And of course the costs will be taxable in the hands of the recipients…

  13. and as usual the people making the accusation fixate on corporation tax. With capital allowances etc, it is unlikely that Boots’s tax rate was ever exactly the UK headline rate. However, all these scare stories ignore things such as Business rates, VAT, PAYE, NIC, which probably amount to a damn sight more than any corporation tax. These other taxes, obviously, are still being raked in by our insanely greedy government.

  14. If £9 billion loan is seen as high for the company, perhaps the company was worth a lot in assets but had low profits? You don’t borrow £9 billion to buy a £1 billion company do you?

    Hey, anyone know offhand how much War on Want are worth? How much trading they do?

  15. Pingback: FCAblog » War on Want’s Alliance Boots analysis found wanting

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