Water companies pay little or no tax on huge profits

Three of Britain's biggest water companies paid little or no tax on their profits last year while generously rewarding their executives and investors, the Observer can reveal. Thames Water and Anglian Water paid no corporation tax on the profits made from their utility businesses while Yorkshire Water kept its payments to the Revenue in the low millions.

All the companies made hundreds of millions of pounds in operating profits and some have rewarded their senior executives with performance-related bonuses and investors with huge dividends. Martin Baggs, the chief executive of Thames Water, which enjoyed a £76m tax rebate in 2012, was given a bonus of £420,000 on top of his £425,000 salary and is in line for a further windfall of £1m based on company performance through to 2015.

The controversy follows a series of revelations that major companies, including multinationals such as Starbucks, Google and Amazon, have used complex financial manoeuvres to avoid tax, while generating huge profits and rewards for their owners.

The figures will be particularly galling for taxpayers because the water companies implement price rises every year linked to the retail price index by the regulator Ofwat and in effect have a monopoly in their areas. Last night the water companies were accused of "highly questionable" financial arrangements by the deputy leader of the Liberal Democrats, Simon Hughes, who has written to the parliamentary authorities to demand an investigation. He said: "The government should use its powers of licensing to make sure the companies behave in a responsible way to their customers and to society, which includes paying their taxes."

Thames Water – which has 13 million domestic customers – enjoyed a £76m tax rebate last year, despite making operating profits of £650m and warning of big future price rises.

The Observer can reveal that despite cutting its tax liability, by piling up debts, Thames has paid out £1.08bn in dividends over the past four years. It avoids tax by offsetting the interest payments on its debts against its tax liability and delaying it by claiming allowances on capital project spending. The company is seeking government support for a £4.1bn project to build a new "super sewer" under the Thames.

Anglian Water's cashflow statement for 2012 reports that the company paid no corporation tax on its regulated water business in the financial year ending in March. The company paid £500,000 corporation tax in the previous year and £1.4m the year before.

Anglian, which lent £1,609.1m to a subsidiary company in the Cayman Islands in 2002, paid £478.1m in equity dividends to investors this year, including its subsidiary in the tax haven. Yorkshire Water, which made an operating profit of £303m in 2012, paid £2.9m in tax on its water profits last year and £11.1m in the year before, having increased the debt on its books recently, which offsets tax payments.

Hughes has written to MPs on the public accounts committee (PAC) investigating tax avoidance. MPs from the PAC have summoned executives from Starbucks, Google and Amazon to account for their tax affairs at a hearing in the House of Commons tomorrow. Hughes wrote: "Yorkshire Water for example has seen its tax liability decline from £70m in 2009 to a tax credit of £18.9m this year after it took out £1bn from a group of finance companies it owns in the Cayman Islands. I believe that this issue raises a few questions which the PAC and the National Audit Office could fruitfully pursue. "

A Thames spokesman said: "With nearly £1bn of deferred tax liability on our balance sheet, tax is being delayed, not avoided. We are structured in an efficient way in accordance with the tax system and the benefits from this flow through to Thames Water customers – in the form of £1bn a year of essential investment while keeping bills among the lowest in the sector. All of the Thames Water group's active companies are resident in the UK and pay tax to HMRC."

A spokesman for Anglian Water said: "Tax is low because of the very significant capital investment that we are making (£2.3bn between 2010 and 2015). Under the UK's tax regime, we are entitled to capital allowances on this investment as an incentive to invest early. However, tax payable is only deferred, so looking at our future tax liability you can see that we will in time pay the tax in full. There is no tax avoidance here whatsoever. The intra-group loan system has no bearing on our tax liabilities."

Yorkshire Water did not respond to questions from the Observer.