Biggest buyout-backed companies paid no corporation tax

A study of the corporation tax bills of the ten biggest private equity backed firms in the UK has revealed that, between them, they actually depleted the Treasury’s coffers last year.

The top ten private equity-backed companies in the UK reportedly contributed no corporation tax in aggregate to the Treasury in 2006, adding further fuel to the recent controversy over the industry’s tax treatment.

In fact, the 10 companies between them received a net credit from the exchequer of £11 million (€16.4 million; $21.6 million), according to the Daily Telegraph, based on analysis of Companies House filings. This was despite combined sales of more than £12 billion and operating profits of more than £400 million.

Under the current tax regime, the 40 percent corporation tax is only levied on profits after interest payments on outstanding debt have been deducted. Since private equity firms usually finance their acquisitions using a substantial amount of debt, the companies they buy will usually face a hefty interest bill. This can often mean they pay less tax as a result.

The Telegraph cited the example of New Look, a clothing retailer owned by buyout firms Apax and Permira – the 7th biggest firm by turnover. The company’s operating profits increased from £84.6 million to £108 million between 2003 and 2006, but its tax bill actually dropped from £25.9 million to £10.7 million because it is now paying £81.5m interest on its debt.

Nonetheless, New Look had the highest corporation tax bill of all the ten companies. Four others – Brakes, Iceland, United Biscuits and Linpac – received a corporation tax credit from the exchequer. Only three of the companies reported a profit after interest payments had been deducted.

Yesterday Aggreko chairman Rupert Soames called on the government to review the tax treatment of private equity, on the grounds that it left other companies facing bigger tax bills.

However, the BVCA has been at pains to point out that the tax rules are the same for every company, and private equity-backed firms enjoy no special treatment.