So is Thames Water tax dodging or not?
by Tim Worstall | 11th, June 2013
THERE are a few alarm bells ringing about this story. Here’s the Mail’s take:
Britain’s biggest water company paid no corporation tax last year despite imposing inflation-busting price rises on millions of customers.
Thames Water made profits of £549million last year after sales rose six per cent to £1.8billion.
But the Australian-backed group, which serves nine million customers in London and the Thames Valley, paid nothing in corporation tax – and even received a £5million tax credit.
No, really, no. That just doesn’t pass the laugh test. A company that has its prices controlled by the government (OK, the water regulator) just isn’t going to be making a net profit of 30% of sales. Simply not feasible.
Here’s where the error is:
The group also spent £400million in interest payments for its £8.4billion debts
Interest on hte debts you’ve got from spending all that money on pipes and reservoirs and pumping stations is indeed an expense of the company. Everyone gets to do this: if you run a business, even one that’s not a limited company, then the interest on loans is indeed an expense of that company or business.
And for a utility like a water company then yes, there will be great big debts. Because that’s what the business is. The water does fall free from the sky after all. What you’ve got to do is build the girt big system of pipes and lakes to get it to people in their bathrooms. Which takes billions of quid to do and then you get the money back over the next 30 to 50 years.
Net profits are therefore not that £550 million number but more like £150 million. And then there’s this bit:
Mr Baggs said:
‘We have not paid much corporation tax in recent years because the Government’s tax system allows us to delay, not avoid, payment of tax based on how much we invest.
‘Because we are investing £1billion a year from 2010 to 2015, more than any water firm in the UK’s history, we are able to defer a lot of tax payments to future years.”
That’s what’s called capital allowances. And there’s no way at all you can have a tax system that doesn’t include these. Say you spend £100 on a pipe to carry water to a house. You’re going to get back £5 a year (entirely made up numbers, just for illustration) in the future as the money you collect from that customer. That £100 is obviously a cost of doing business. But the government doesn’t let you write off that £100 as a business expense in that first year. Because it’s capital investment, see? What the government says is that you can write off £10 of it each year (there are different rates for different things but this is the general idea) against your taxes. Until you’ve written all of it off in 10 years. So, for the first en years you’re making a loss on this new pipe: you’ve a £10 write off and £5 in revenue. Then, after 10 years, you’ve a £5 profit a year: upon which you pay tax.
So, when your investments are higher than your profits, then you’re not paying profit tax: but you’re just delaying it, not getting out of it altogether. The system doesn’t have to be exactly this way: but something like this system has to exist. Otherwise no one would ever invest in capital equipment.
This story is all over all of the papers by the way: and they’ve all got it wrong.
Tim Worstall
Posted: 11th, June 2013 | In: Money Comment
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