Multinational Companies and UK Corporation Tax

Charlie Elphicke Excerpts

Thursday 27th June 2013 Commons Chamber

[Charlie Elphicke (Dover) (Con)]

It is a pleasure to speak in the debate, and I congratulate my hon. Friend the Member for Warwick and Leamington (Chris White) on securing it.

Hard-working families want a better life for themselves and their children. They go out each day, work hard, strive, and pay their taxes. They face increasing costs in some areas of their lives, particularly in rising household bills for gas, electricity and water. The average family have seen their annual household bills rise by £384 since 2010.

I am concerned about whether utility companies are paying the appropriate amount of tax. I have done a study of nine water companies, which, collectively, have a turnover of £28 billion and operating profits of £10 billion a year, yet they paid just £541 million in tax, an effective tax rate of 5%, which goes down to about 3% if we take into account those who have been declaring tax losses.

I have looked at two electricity companies, EDF and RWE npower, which have a collective total turnover of £25.6 billion and operating profits of £1.7 billion, yet they paid no tax whatever. It cannot all be explained by capital allowances. Foreign-owned utilities, particularly in the water industry, have been engaging in schemes using debt interest to avoid tax, which, on my calculations, have resulted in a loss to the Exchequer of about £1 billion over the last three years.

Let us take the example of Southern Water, which covers the area I represent. Over the three most recent years for which figures are available, it generated more than £2 billion in turnover, operating profits of £767 million and paid a net tax charge of £45.9 million. That is an effective tax rate of 6%. Yorkshire Water, over the last three years, generated £2.6 billion in turnover, operating profits of £990 million, and yet received a net tax credit of £46.2 million. Anglian Water, over the last three available years, generated £3.3 billion in turnover, operating profits of £1.4 billion and paid a net tax charge of just £124.7 million. That is an effective tax rate of 8.9%.

What concerns me particularly is that those companies have been abusing the interest deduction system. Over the last three years, Southern Water made some £481.6 million of net interest and interest-related payments to the multinational owners of group companies overseas. According to my calculations, the tax forgone is a potential £125 million for the Exchequer. Yorkshire Water, which is especially egregious in this respect, made £548.5 of net interest and interest-related payments to group companies. According to my calculations, the tax forgone is £142 million. Anglian Water made £365 million of net interest and interest-related payments to group companies over the three most recent years for which figures are available. According to my calculations, the tax forgone is some £95 million.

Over the three most recent years for which figures are available, EDF, which is owned by the French Government, made £268.4 million of interest payments to group companies. According to my calculations, the tax forgone is potentially £70 million, if we assume a corporation tax rate of about the average, 26%. Npower made £58 million of interest payments to group companies. According to my calculations, the tax forgone is £93 million.

I am calling on the regulators to examine the position and to say that if the water companies, in particular, are receiving too high a return in total, they should either be subject to a windfall tax or reduce customers’ bills. Tax-avoiding water companies, and other utility companies, should be made to give a rebate to hard-pressed customers who have faced increased bills in recent years. I hope that Ministers will consider the options available to them. In any event, tax law should be changed so that interest is no longer favoured over equity. Specifically, interest payments from one group company to another should not be tax-deductible.