A MASSIVE tax loophole that has allowed the private rail industry to profiteer from £1.3 billion in unpaid tax should be closed in tomorrow's budget, Britain's biggest rail union today urges the Chancellor of the Exchequer.

The deferred-tax loophole, intended to encourage investment but used instead to fund increases in dividends to shareholders, is an obscenity, RMT says, not least when passengers are facing ever-higher fares, overcrowding and delays.

A study for the union by tax expert Richard Murphy of Tax Research revealed last October that nearly half of the £1.5 billion in dividends paid out in the last five years by nine private train operators and rolling-stock companies has been funded by unpaid tax.

It showed how rail companies are hiding behind accounting rules which allowed them to suggest they are paying more tax than they are, and that real profit levels were far higher and tax actually paid far lower than figures initially declared. (details below)

The call for the loophole to be plugged has been taken up in an Early Day Motion, tabled in the House of Commons by John McDonnell and signed by 30 other MPs by today.

"The six biggest train operators and the three rolling-stock companies owe £1.3 billion in deferred tax, but it will almost certainly never be paid and is effectively a massive hidden subsidy to be divvied up among shareholders," RMT general secretary Bob Crow said today.

"This is money that should be funding railway engineering, but it is being used instead for financial engineering, turning hidden subsidies into pure profits for shareholders

"When passengers are facing a future of massive fare increases and the government is cutting subsidy to the rail industry by £1.5 billion over the next six years, the government should be telling these companies to stump up the £1.3 billion they owe to restore that funding.

"We need to face the fact that private-sector involvement in the railways is about maximising profit, and stands in the way of delivering the growing, affordable people's railway that our economy and environment desperately need," Bob Crow said.

ends

Early Day Motion 1089
Tax Paid By Railway Companies

Tabled by John McDonnell and signed, at March 11, by 30 others

That this House notes the report by the Tax Justice Network for the RMT union that the privatised rail industry is profiteering from £1.3 billion in unpaid tax and is using a deferred-tax loophole intended to encourage investment to instead fund increases in dividend payouts to shareholders; is appalled that whilst private rail companies are profiting from this tax loophole passengers are being asked to pay higher rail fares and endure delays and overcrowding on many rail services; therefore urges the Chancellor of the Exchequer to use the forthcoming Budget to announce that this tax loophole will be closed; and believes that this further example of shameless profiteering at passengers' expense once again demonstrates the need for a publicly owned and publicly accountable railway.

Notes to editors: An executive summary of the report and biographical notes on Richard Murphy follow.

The companies whose accounts were analysed in the report are: First Group PLC; Go-Ahead Group PLC; Stagecoach Group PLC; Arriva PLC; National Express Group PLC; Virgin Rail Group PLC; Porterbrook Leasing Company Limited; HSBC Rail (UK) Limited, and Angel Trains Limited.

Tax paid by Railway Companies

Executive Summary

This report is based on detailed analysis of the accounts of six railway operating companies and three railway leasing companies operating in the UK. In each case their last five available sets of accounts were reviewed, meaning that the survey concentrates on the period 2002 to 2006.

In this period the declared profits of the companies in question increased from £435 million in 2002 to £810 million in 2006. Their sales income curiously varied little over the period, moving about an average of about £11.6 billion a year throughout the period.

The tax they paid did, however, fall dramatically over the period. According to their profit and loss accounts their tax charges fell from £188 million or 51.4% of reported profit in 2002 to £169 million in 2004, when the declared tax rate was 22.1%, a rate that was also seen in 2006.

But this is not the whole story. The profits these companies declare are not the profit figures on which they pay tax. Most of the railway operating companies (but not the rail leasing companies) have significant goodwill charges in their accounts which are highly unlikely to be tax deductible. This increases their taxable profits by this amount.

At the same time, all the companies include in their accounts charges for 'deferred tax', which can best be described as estimated amounts of tax that might be payable at some time in the future as a consequence of transactions that have already occurred, but with there being no certainty as to when, if, or ever that tax might be due. Overall the amount of deferred tax owed by these companies increased from £948 million to £1,297 million over the period. The increase was less than the total deferred tax charged against their profit by all the companies in the period, which totalled £527 million because of changes in the rules on the way the balances had to be accounted arising as a result of the introduction of International Financial Reporting Standards in 2005.

Two points are however clear: first that these balances seem unlikely to be paid and second that deferred tax charges can therefore be ignored as real tax charges. They should instead be considered to be interest free loans to the railway industry for which there is no repayment date. By 2006 one third of all the finance required by the industry was being provided by the government in this way without it taking any credit for the benefit it was providing.

Taking these two adjustments to the profit and tax charge into account a very different picture of tax paid is revealed. Profits now increased from £584 million before tax to £894 million before tax over the period. Taxes due fell from £109 million to £71 million. The tax rate fell from 18.7% to 7.9% (and just 3.8% in 2005).

If tax had been paid on these profits at the 30% headline UK corporation tax rate the sums due would have been £66 million in 2002 and £198 million in 2006. Over the period £731 million of tax was not paid as a result of the low tax rates the industry enjoyed.

Of this sum £527 million is explained by the deferred tax charges. According to the accounts of the companies themselves the second biggest reason is 'prior year adjustments'. What this means is that they have not had to pay tax that they had declared they might. Almost certainly this means that tax planning arrangements the companies had presented to HM Revenue & Customs but were too cautious to assume would work were accepted as valid by that authority, or at least were not challenged.

The resulting impression is of an industry that has saved itself over £700 million in tax in five years and is sitting with £1.3 billion of unpaid tax on its balance sheet: tax that might never be paid but which is being used to provide one third of the funding required to keep this sector going.

Who benefits from this tax lost? Certainly not the government. And there's no indication that it is the consumer. It must be the companies themselves. Profits of the companies surveyed almost doubled during this period. Their tax paid tumbled. And they paid almost £1.5 billion in dividends to shareholders in this five year period. Half of this sum was financed by tax not paid.

There is an obvious question. What better use could have been made of that tax not paid, in the railway industry or in society at large? And why have we allowed the railway industry become a mechanism for financial planning, one of whose primary purposes is to turn unpaid tax into an income stream for shareholders?

It's certainly no way to run a railway.

Richard Murphy - biography

Richard Murphy is a chartered accountant and graduate economist. He trained with KPMG in London before setting up his own firm in 1985 in London. He and his partners sold the firm in 2000 when it had 800 clients. He is a serial entrepreneur, having directed more than 10 SMEs.

Since 2000 Richard has increasingly been involved in taxation policy, both as an adviser and campaigner. He is director of Tax Research LLP and advises the Tax Justice Network, the Publish What You Pay campaign and many NGOs on tax and development.

He is a member of the ACCA's Research Committee and is a research fellow at the Centre for Global Political Economy at the University of Sussex and at the Tax Research Institute at the University of Nottingham.

A regular radio and TV commentator on tax and corporate accountability, he has also addressed UN, EU, HMRC and international diplomatic meetings on these issues. He writes a daily blog at www.taxresearch.org.uk/blog