Three of the UK’s privatised water companies still have subsidiaries in the Cayman Islands tax haven, more than three years after the regulator urged their closure in an attempt to rebuild public trust.
Southern Water, South East Water and Welsh Water all have finance companies registered in the islands, though all three say they provide no tax benefits. Southern Water and Welsh Water paid no corporation tax in the year to March 2020. South East Water paid £1.9m tax on pre-tax profits of £33.8m.
Although the industry regulator Ofwat does not forbid financial holdings in tax havens, since 2017 it has encouraged the industry to close any Cayman Island subsidiaries after sustained public criticism of high executive pay and dividends, coupled with a perceived lack of investment.
In a statement, Ofwat said: “Damaging behaviours in the past have left a gap that still needs to be closed and we believe that moving away from having Cayman Island subsidiaries can be part of closing that gap.
“Water companies provide an essential public service and so we expect these businesses to demonstrate corporate attitudes that can build public trust.”
Ofwat has been trying to tackle poor behaviour in the industry. Four out of England’s nine combined water and sewerage companies were recently rated as poor or requiring improvement, the worst result since 2011, and water companies have also been criticised for failing to repair leaks.
Three of the 11 privatised water and sewage companies in England and Wales are stock market listed, while the rest are owned by a collection of mainly private equity and sovereign wealth funds.
England is the only country in the world with a fully privatised water and sewerage system, with ownership transferred from the state to large regional monopolies in 1989.
The Cayman subsidiaries were set up a decade ago to get around rules preventing the water companies from raising cash on the bond markets. Although those rules have since been scrapped, many continued to use them. Interest payments made through havens are often not taxed as heavily.
Thames Water, Yorkshire Water and Anglian Water have all closed their Cayman subsidiaries in the past two years.
Nick Hood, analyst at Opus Restructuring & Insolvency, said: “For all the protestations of full tax accountability, any business that is a private monopoly deriving its revenues from the UK public needs to understand that having a subsidiary in the Cayman Islands and its ultimate parent company in Jersey will rightly be viewed with suspicion.
“If these arrangements are not designed to deny public scrutiny or to deprive HMRC of tax revenues, then why do they still exist?”
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Southern Water, owned by a consortium including JPMorgan Asset Management and UBS Asset Management, had promised to close its Cayman subsidiary by the end of 2018 but in a statement this month said it is “in the process” of doing so.
“The vehicle has no impact on Southern Water’s tax position and we are taxed entirely in the UK and considered ‘low risk’ by HMRC,” the company said. It added that although it paid no corporation tax, it did pay other taxes such as business rates and employment taxes.
As with many of the water companies, Southern has a complex corporate structure involving more than 25 subsidiaries and a top company registered in Jersey.
South East Water said it was “registered in the Cayman Islands for historic company law reasons but . . . is resident in the UK for tax purposes”.
“The company does not gain any tax benefit from this. We have committed that no further debt in the Cayman Islands will be raised,” it added.
Welsh Water, which operates as a not-for-profit with no shareholders, said its Cayman subsidiary was due to be closed in the next few months. “Our tax liabilities are low, because most of our revenue is usually reinvested directly back into our network as capital expenditure,” it added.
Ofwat was recently overruled on its “price control” settlement, which governs how much companies can charge consumers from 2020-25 and would have forced them to cut bills.
Anglian, Bristol, Northumbrian and Yorkshire Water appealed against the settlement and the Competition and Markets Authority ruled in their favour, arguing that they should be allowed to charge customers more to allow for additional spending and higher returns for investors.