Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1bn of tax on profits from the sale of its UK properties.
The complex new structures uncovered by a six-month Guardian investigation include a string of Cayman Island companies, each named after a different colour, from aqua to violet. These are being used by the supermarket giant as it proceeds with its announced programme to sell and lease back £6bn worth of its UK stores.
The stores are being sold to external investors providing Tesco with a big one-off gain which, ordinarily, would be liable to tax, while allowing it to remain in the stores and pay rent to the new owners.
The first two deals, worth £445m and £650m, have already used the companies set up in the Cayman Islands – where the rate of corporation tax is zero – allowing Tesco to avoid tax on about £500m profit. Large corporations are increasingly developing strategies to cut tax bills and Tesco is not alone in its tax planning.
Nearly a third of the UK’s 700 largest businesses paid no corporation tax in the year 2005-6. A further third paid less than £10m each, according to figures from the National Audit Office released last year.
Alistair Darling, the chancellor, recently provoked an outcry from wealthy individuals by launching a crackdown on non-domiciled residents in Britain who pay no tax on earnings outside the country.
Revenue & Customs said this week it was on the trail of up to 30,000 people owing more than £100m in back taxes who have hidden their assets in secret accounts in Leichtenstein. But companies such as HSBC have argued against the UK tax system by threatening to move their headquarters overseas where rates are lower.
The Guardian’s analysis of Tesco’s accounts over the past five years also shows that the company has paid an effective tax rate of just over 20% on the rest of its profits, at a time when the UK corporation tax rate is 30%.
Tesco defended its position, saying it had a duty to organise its affairs in a tax-efficient manner. It said profits from its interests are included in full in the company’s UK tax returns. It also said it was one of the largest taxpayers in the UK.
The investigation has found:
· New company structures set up by Tesco to own stores that are being sold and leased back mean that 99.9% of the company that owns the stores could end up being held offshore. Tesco would be liable to pay UK tax on only the 0.1% of its profit on the sale of the stores held in the UK. Tesco’s first two property deals, worth about £1bn, have used this structure and will avoid tax on £500m of profits.
· Although its accounts for the past five years report an average rate of corporation tax of 29%, the actual rate of tax Tesco paid, according to its cash flow statement, is closer to 20%. This is on profits separate from the property deals. UK corporation tax is 30%.
· Tesco has sold its 37 stores in the first two sale and leaseback deals at twice the book value that is included in its accounts, making a profit of about £500m on the £1bn of stores sold. If it achieves the same rate of return on all its disposals as expected, its share of profits from property sales would come to about £3bn. The UK corporation tax due on this would be as high as £1bn, but the retailer could avoid paying this because of its offshore structure.
· A string of other company structures leading to the Cayman Islands have been set up and more of Tesco’s properties have already been transferred to them so that they could be quickly activated for the next tranche of store sales.
Tesco’s executive director, corporate and legal affairs, Lucy Neville-Rolfe, defended the offshore structures in a statement.
“While every company seeks to operate as tax-efficiently as possible, to do so is our duty to shareholders and customers alike – Tesco pays a great deal of tax.
“Tesco is one of the UK’s largest taxpayers. For the year to February 2007 we paid over £1bn in the UK in corporation tax, business rates, employer’s national insurance contributions and other taxes. Combined with the approximately £750m of PAYE tax, employee’s NIC and net VAT that we collected in that financial year, this means we are in the top 10 taxpayers in the UK.” She added that this was “a marked contrast to the significant number of FTSE-100 listed companies that pay little or no corporation tax at all”.
The statement added that it was normal for cash tax payments to differ from accounting charges. “These differences, which account for the disparity between the 29% accounting charge and the 20% cash tax payments are mainly down to timing and arise because tax laws and financial accounting standards differ in their recognition criteria.”
Tesco would not comment on how the ownership of its new partnership companies was structured. “We are not prepared to supply you with commercially confidential documents such as the partnership agreements and other information,” Neville-Rolfe said.
She continued: “Transactions such as these are by their very nature complex as they have to be structured to meet the commercial needs of Tesco, the new partner and the banks providing finance.
“We have an open relationship with Her Majesty’s Revenue and Customs and meet with them regularly to discuss our tax affairs, including our property and international transactions. Full details have been provided to HMRC in the normal way.”