So Ritchie tells us that nPower is very naughty because they finance their investments here by borrowing money from the German parent. They then pay interest on this so that that interest is taxed in Germany not the UK.
Apparently it\’s very naughty that filthy foreigners do send their sausage smelling money into the UK to build power stations. Only good wholesome British money should be used, not this foul European muck. Might even have garlic in it.
But against that it offset £271 million of exceptional items in 2010 and, much more importantly, £313 million of interest paid (the charge was £133 million in 2009). Of this charge almost all was with group undertakings, as the note shows. In fact it looks like some £358 million was paid in interest to group undertakings (which nPower admit to be its German parent) over the three years. So, even if there had been no exceptional items, and ignoring the tax free income from dividends (which seems fair) on the core underlying trade as reflected by the operating profit nPower was actually structured so that the whole operating profit of £235 million was bound to be cancelled by interest paid.
And that is the best explanation as to why this company is not profitable and does not pay tax. It’s been designed to ensure that outcome.
Now it is of course up to a business to decide how it structures itself. That is a legal choice. But it’s also a matter of fact that the UK tax system is remarkably generous in giving tax relief on the payment of interest – much more so than the German system is, for example. It’s not true to say we allow all interest without question, but the latitude is very high. The result here is that by choosing to fund much of the UK business of nPower with loans on which interest is paid the profit that would otherwise be taxed in the UK is essentially shifted to Germany where the interest is received and it appears as a result that nPower is a wholly unprofitable business in this country even though the operating profits indicate otherwise.
Now we’ve been here before of course: this is the Starbucks, Google and Amazon stories all over again. Everything is legal, of course, but the profits have moved location. And they clearly have in this case. nPower is not an unprofitable business, overall. Far from it, in fact. But because of decisions made on business structuring, which are clearly very advantageous under the UK tax system, the UK loses out on all tax being paid by this company although Germany might benefit considerably.
So the question is, and 38 Degrees are right to ask it, is whether this is ethical? My suggestion is that it is not. If tax compliance is paying the right amount of tax (but no more) in the right place at the right time then I think the structure used means that tax is paid in the wrong place – i.e. in Germany and not here. And when this is a public utility servicing the UK consumer I think that is unacceptable. And in that case I think 38 Degrees are right to protest and to suggest that reform is needed to the Uk tax system to end this possibility. What is more, I think nPower, by offering an excuse for non-tax payment that simply does not consistently stack shot themselves in the foot and showed they had something to hide here.
So keep protesting 38 Degrees, I say. You got this right.
Worth noting that under EU rules it would actually be illegal for the UK to even think of trying to tax those interest payments to a company based in another EU country.
But do look at the petty nationalism of his argument. The near autarkic fascism of it. He\’s not even arguing that less tax is being paid as a result of this. He\’s arguing only that less tax is being paid in the UK. And even that\’s not certain: if they\’d issued bonds which were bought by foreigners we\’d still have had foreign capital paying for the power plants and the interest would still be going to foreigners.