Ritchie on nPower. Err, how about the law matey?

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.

15 thoughts on “Ritchie on nPower. Err, how about the law matey?”

  1. Little feature of Ritchie’s analysis; I think it was all based upon the consolidated pubished accounts; CT is based upon solus compnay accounts. In other words, you will really, really struggle to tell very much about the tax bill at all from that. Ritchie by contrast is able to denounce nPower as unethical. I bow to his superior intellect and knowledge.

  2. He’s tried to find a reason to justify the ‘campaign’, and that was the best he could do. It’s idiotic.. but the Graun has gleefully endorsed his analysis today so this whole things has officially moved into the world of ‘fact’.

    Just how stupid does one of these stories need to be before people realise that the tax justice industry is taking the piss?

  3. @ Ironman

    We know that it’s not based on whatever 38 degrees were looking at… because there’s no possible way to get to £766m of op profit from those numbers.

  4. …although Germany might benefit considerably

    Well, yes. And when BP pays tax in the UK from its overseas operations, the UK benefits considerably. Why does he assume that the UK makes a net loss from this arrangement?

  5. Surreptitious Evil

    Ritchie is only keen on the law when he has written it and gets, rather than the courts, to interpret and apply it himself.

  6. One might almost be drawn to the conclusion that there is a distinct national element to RMs socialism………… 🙂

  7. I’m a little confused. Since when did npower have anything to do with power plants? They’re a retailer, like Tesco or Sainsburys – well, more like Aldi, or going through the bins – but they have no capital costs worth mentioning. The parent group has power stations, but that doesn’t explain why nPower has large loans to pay interest on.

    They say a stopped clock is right twice a day. Ritchie can’t quite aspire that high, but in aiming at npower, he has at least picked a reasonable target this time. They’re as close to crooks as makes no difference, in my experience, so I wouldn’t be surprised to find out that they are in fact the largest business in the country engaging in such gray-area tax-avoidance that it’s probably evasion: it’s the kind of thing they do.

  8. Dave

    You seem to have an obsession with nPower. The wiki page says:

    The company also owns Aberthaw Power Station in South Wales, Pembroke Power Station in West Wales, Didcot Power Station in Oxfordshire, Little Barford Power Station in Bedfordshire, Great Yarmouth Power Station in Norfolk, Fawley Power Station in Hampshire, Tilbury Power Station in Essex and Littlebrook Power Station in Kent.

  9. and from the nPower blog:

    Is it true you haven’t paid any corporation tax?

    We have nothing to hide – we pay all the tax that is due. Our corporation tax bill in 2009 – 2011 was £5m, calculated under the UK tax rules HMRC apply to all companies. Why? Mainly because of two things.

    Firstly between 2009 and 2011, our underlying UK profits were comparatively low compared to levels of our investment – we actually made losses in our retail businesses in 2009 and 2010.

    Secondly, the government encourages companies like npower to invest in assets like new power stations to help keep the lights on in the UK. Since 2008, we have invested nearly £3 billion – that’s £120 for each and every household in the UK. And the annual tax write off on these investments is bigger to start with than in our accounts, so our taxable profits are lower than our accounting profits.

    We’re proud that HMRC classes npower as a ‘low risk’ business – we stick to the rules, we pay the tax that we owe and we don’t engage in tax avoidance. Over the last three years, we’ve paid around £400m in employment and property taxes.

  10. Diogenes>

    An unsourced Wiki statement isn’t quite enough to persuade me, I’m afraid. Unless they’ve changed things around, RWE is the parent of nPower and owns power stations; nPower is, or was, purely retail. I can’t find anything in their corporate docs that says otherwise, but then I couldn’t be bothered to look to hard.

  11. Dave
    source http://www.npower.com/home/index.htm

    If a public statement from the CEO does not convince you, then you are probably slightly blinded by beliefs.

    In the 2012 Annual report of the RWE group, they report euro 190m capex in 2012 and euro 416m in 2011 in the UK.

    On page 53 of the report, they say that there is gong to be a reorganisation in the group’s reporting structure but the 2012 results are in the old structure:

    United Kingdom:
    This is the item under which we report on RWE npower, one of the country’s six major energy companies. Until the reorganisation, the company generated electricity from gas, hard coal, oil and biomass. Furthermore, RWE npower sells electricity and gas to end-customers. Similar to Essent, this will be the future focus of its business activities.

    The 2013 results are not yet available, but I imagine the UK generating assets will have been hived into a RWE UK division.

    http://www.rwe.com/web/cms/mediablob/en/1838516/data/1403032/11/rwe/investor-relations/reports/2012/RWE-Annual-Report-2012.pdf

  12. @Dave “Since when did npower have anything to do with power plants? ”

    Since forever. nPower is essentially the UK arm of National Power, which was the largest of three generating companies formed at privatisation of the electricity, plus some retail operations. The international operations of National Power (called International Power) were flogged off to GDF Suez more than 10 years ago.

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