Sold down the river: How Thames Water diverts its tax liability via the Caribbean despite £549m profit and 6.7% price hike

Britain’s largest water company has been accused of “ripping off the taxpayer” after it paid no corporation tax last year despite making profits of more than half a billion pounds.

Thames Water put up customer bills by 6.7 per cent, awarded its chief executive a £274,000 bonus and made profits of £549m on a turnover of £1.8bn. Yet customer satisfaction had dipped and hundreds of people’s homes were flooded with sewage.

But the company succeeded in cutting its tax bill to zero and was even handed £5m credit from the Treasury by writing off investments against the amount it was due to pay the Government.

The company’s accounts also show it paid £328.2m interest on “inter-company loans” via a Cayman Islands funding vehicle to pay external bondholders such as pension funds.

The arrangement is legal, although the head of industry regulator Ofwat said that the large profits and complex tax arrangements of some water companies were “morally questionable”.

“The dichotomy between profits and the prices charged to customers raises business, regulatory and moral questions,” said Jonson Cox. “Tax policy is not for an economic regulator and these structures may be legal and common in private equity. But some aspects are morally questionable in a vital public service.”

Thames Water’s finance director, Stuart Siddall, denied that the company was avoiding paying tax: “We have an absolutely clear conscience about everything we are doing. Everything is transparent. We are reviewed by HMRC every year as a major corporation and we are seen as low-risk because our tax is very straightforward.

“The Cayman Island companies are there purely to comply with UK company law requirements for the acquisition financing structure.” Critics said it was a “disgrace” that one of Britain’s biggest and most profitable companies was not making a greater contribution to the Exchequer.

Thames Water, owned by the Australian company Macquarie and a group of investment funds, said its tax bill was reduced by capital allowances on its £1bn-a-year investment programme. The remaining gains were offset by tax losses claimed from other members of the group.

It claimed the combined bill for business rates and employee income tax and national insurance and other taxes was £150m, while spending with suppliers and contractors boosted the wider economy. Thames Water recorded 549 incidents during the year when consumers’ homes were flooded with sewage as a result of record rainfall. River pollution also increased, the company said, including a “significant incident” at the River Wandle in south-east London.

At the same time Thames Water’s chief executive Martin Baggs received a pay rise to £450,000 plus a £274,000 bonus. Next month he is in line to collect a further £366,000 as part of a long-term incentive plan.

Mr Baggs vigorously defended the company’s taxation policy. “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,” he said. “Because we are investing £1bn 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.

“The HMRC tax mechanism is called the capital allowance. Its aim is to encourage firms like us to carry out early and extensive infrastructure investment. If capital allowances did not exist it would mean one of two things: customers’ bills would be higher, or Thames Water would invest less.

“As things stand we invest record amounts while our customers’ bills remain the second-lowest in the sector, at less than £1 a day. Thames Water continues to contribute around £150m annually to the public purse in other tax, including central and local government business rates, PAYE and national insurance,” said Mr Baggs.

Thames Water’s accounts also show it paid £328.2m interest on “inter-company loans”, that, Stuart Siddall said, was paid via a Cayman Islands funding vehicle to its external bondholders such as pension funds. He said the funding vehicle was “registered in the UK for tax” and there was “no tax advantage” as a result.

But Dave Prentis, general secretary of public sector union Unison, said: “This is a disgrace. Since privatisation, water companies have been ripping off consumers, pushing bills up much higher than inflation. Now we know they are ripping off the taxpayer, too.”