Summer reading: Yorkshire Water paid no tax last year

This is the business singled out by tax lawyer-turned-Tory MP Charlie Elphicke in the House of Commons last month as an “especially egregious” example of companies abusing the interest deduction system.

In its most recent financial year, during which average bills rose by 6.6 per cent, the foreign-owned utility made a healthy profit of £248.5m on revenues of £936.2m.

So how much corporation tax did Yorkshire Water pay? None, it seems. In fact, the annual report shows a tax credit of £62.3m.

The report explained that under a long-established UK tax law concept known as ‘group relief’, Yorkshire Water can offset losses, including those interest costs incurred by other group companies, against its taxable profits.

Yorkshire Water said it has significant borrowings to fund its capital expenditure programme. Its total net debt stood at £3.4bn at the end of March 2013. Meanwhile, the group paid dividends to its shareholders of £256.6m during the period, up from £63.4m the previous year.

As previewed by myself earlier this month, Yorkshire Water used the annual report to clarify its corporate structure, which includes a number of companies in well-known tax havens, mindful perhaps of rising public and political awareness of this risky issue.

The group established three companies in the Cayman Islands as part of its “whole business securitisation” (WBS) in 2009.

According to Yorkshire Water, the WBS enhances its creditworthiness, allows it to borrow more money at lower rates and helps it pay less corporation tax, which it claims ultimately benefits customers.

Ms Hodge, a fierce critic of corporations “putting so much time, energy and money into finding ways to avoid making their proper contribution”, might disagree.

In any event, the group said the reason for setting up the Cayman Islands structure has now passed.

Yorkshire Water is now examining whether to move the companies closer to home. This would cost a seven-figure sum, but could generate some positive publicity for the group, which has worked hard to improve its operational performance and image since the 1990s.

The group must be mindful too of excessive remuneration for its senior management. Total emoluments last year reached £4.21m for the 13 executive and non-executive directors. Richard Flint, chief executive, received a total of £1.09m, while Kevin Whiteman received a total of £1.07m for his efforts as a non-executive chairman.

These are large sums in the eyes of cash-strapped households facing the biggest squeeze on living standards in many years and water companies must be careful not to lose the goodwill of the public they serve.

Currently, the industry is in delicate negotiations with regulator Ofwat about spending plans for the period 2015-2020, including how much it can charge customers.

Yorkshire Water will submit its business plan this December and we will see how tough a line the watchdog takes. For instance, will Ofwat match the rhetoric of chairman Jonson Cox – a former Yorkshire Water director – who criticised the industry earlier this year for not taking more steps to recognise customers’ pain as bills go up?

Political pressure is certainly growing for reform of the sector. In April, a report by the New Policy Institute for Unison, one of Labour’s biggest backers, found it “a very odd industry indeed, one whose ownership is opaque, whose consumers are powerless and whose profits are high – 30 per cent (more than £100 a year) of the average water bill”. The NPI report concluded it is high time the industry received serious scrutiny.

Today, Yorkshire Water is set to share its plans for the future at a conference for stakeholders in Harrogate. It will include a question time session on the economic, social, political and environmental challenges facing the group.

Unfortunately, I won’t be able to make it, but this opinion piece should set out some of the issues the directors must deal with as they try to balance the competing demands of water supply, climate change and population growth during a time of economic austerity – and growing calls for tax reform.

n There are many and varied official economic indicators which taken together can sometimes paint a contradictory picture of the state of the nation.

Here’s one though that should give you some heart. We have seen an increase of around 10 per cent in the number of entries received for our flagship Excellence in Business Awards.