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Biting the hand that feeds them

Prem Sikka on the tax avoidance scam operated by some PFI companies

In most societies, the state makes social investment in education, healthcare, transport, security, pensions and a variety of public goods. The huge public investment stimulates demand for corporate products and services and increases company profits. The public investment is primarily funded through taxation and can only be sustained as long as the tax base is not undermined

The operation of the Private Finance Initiative (PFI) provides illustration of the ways in which corporations feed off the taxpayer and then develop strategies for eroding the tax base.

PFI was promoted in the 1980s by the then Conservative government to expand the role of the private sector in the provision of public services such as refuse collection, catering and cleaning services in schools, hospitals and government offices. In the 1990s, PFI became the mechanism for the delivery of assets as diverse as schools, hospitals, fire stations, police stations, railways, roads, street lighting, defence equipment and army  barracks.

In general, private sector companies build the asset and lease it to the government. In return, the government, or the taxpayer, makes payments for the next 25-30 years. Private sector recoups its original outlay, cost of borrowing money to provide assets and profit thereon. PFI reduces risk and uncertainty for the private sector. Its profits are guaranteed because governments rarely go bust and can always print money, or levy additional taxes, to pay companies.

Since 1997, the Labour administration has expanded the role of PFI. At the time of writing there are about 865 PFI projects with an initial investment of £57 billion, but the taxpayer is committed to repaying around £160 billion, and rising. PFI is a money making machine not only for companies but also their advisers. Accountancy firms play both sides of the street and have raked up more than £500 million in fees from government departments.

PFI  companies are paid out of tax revenues, but are shrinking the tax base. Numerous practices are used to avoid taxes, including setting up complex structures in offshore tax havens which peddle secrecy, low or no corporate taxes. Generally, companies are taxed at the place of their control. It is not too difficult to establish that companies trade in the UK, but are controlled from some offshore jurisdiction. A UK investor receiving dividends will need to pay income tax. However, an investor resident in an offshore tax haven will escape UK taxes. Companies registering property in tax havens can also escape stamp duty and UK capital gains tax.

In March 2008, The Guardian reported that a £311m PFI scheme was devised to build, finance, operate and maintain new Home Office headquarters. Subsequently, in 2006, most of the PFI company’s ownership was transferred to Guernsey, a tax haven, in a 29-year deal. Investors in this type of PFI scheme would avoid paying UK tax on their income and profits. Other schemes now based mainly offshore are a £40m contract for schools in Conwy, Gwynedd, a £60m health and safety laboratory in Buxton, Derbyshir

The Sunday Herald reported that a £134 million project to build and refurbish 11 schools in Scotland is handled by an offshore entity. The consortium formed to run the project, Alpha Schools (Highland) Limited, is a British registered company and liable for UK tax. But one of the firms with a 50% equity stake in Alpha is 3i Infrastructure Ltd, a Jersey-based outfit. A spokeswoman for 3i Infrastructure told the newspaper: "Alpha Schools is a company registered in the UK and liable to UK tax. It has two main shareholders: 3i Infrastructure Limited and Galliford Try - a leading construction firm...3i Infrastructure is a Jersey-based investment company. However, the PFI companies in the portfolio of that company are registered and taxed in the UK in the normal way. The post-tax profits from these PFI companies are simply aggregated by 3i Infrastructure, before being passed on to investors". What this means is that any investor not resident in the UK would not pay UK income taxes.

Some months ago I investigated Innisfree Group Limited, a major PFI player for schools and hospitals, for Channel 4’s Dispatches programme, which was broadcast on 14 August 2006. The Group had offshore shoots. Its audited accounts filed at Companies House did not show any payment of UK corporation tax. A large amount of its income was aggregated in offshore structures. Upon further investigation, it was found that 104,000 of its 299,600 shares were held by Coutts Bank in Jersey. Whether they were actually owned by Coutts, or the bank was acting as a nominee for some anonymous investor was not known. The upshot is that the dividends received by the holder(s) of the 104,000 shares would have escaped UK income tax.

The PFI shenanigans are the height of corporate irresponsibility and should be stopped. Public contracts should not be awarded to companies or investors resident outside the UK for tax purposes. Companies should be forbidden to transfer any aspect of PFI contracts to a location outside the UK. All companies bidding for public contracts should provide a public account of tax payments for the preceding five years. This should include copies of their tax returns and a table showing the jurisdictions that it operates from, together with sales, costs, profits, employees, assets, liabilities in each. Thus at a glance we would be able to see that a company has lots of sales or rental income in the UK, but pays little or no taxes. Some companies would show lots of profits in tax havens, but virtually no employees. Such information would empower citizens to ask searching questions. The above proposals do not impose any additional costs on companies as they already have all the information. No doubt, companies used to getting their way would step up their funding for political parties and individual politicians to stymie change. Can we continue to letcompanies erode the tax base and accept the consequences?

Prem Sikka is Professor of Accounting, University of Essex