An independent review of corporation tax paid by the water sector has called on Ofwat to address issues identified in its treatment of tax that resulted in the companies paying £710m less tax than was allowed for without reducing bills during 2010-2-15.
The targeted review by professional services firm, Alvarez and Marsal (A&M). followed a 2015 report by the National Audit Office (NAO) which highlighted the chief reasons behind the tax shortfall during periods of the 2009 price control period.
A&M recommended measures to improve transparency that extended beyond Ofwat's 2015/16 guidelines under Annual Performance Reporting. They included:
● reconciliation between the tax charge or credit of the appointed business to the current tax charge allowed in the final determination with detailed explanation of material variances;
● a requirement to provide details of material prior year adjustments;
● details of group relief claims should be provided including whether payment made or not and if so at what rate; and
● continued monitoring of developments in tax disclosure. Ofwat should review these to consider if and how to implement them for the regulated companies.
The NAO noted a £480m windfall from unpaid-for group relief during 2010-15; a £410m underpayment that arose from the regulator's assumption of a 28% standard corporation tax rate after the rate fell to 21% during 2010-15; and companies' one off adjustments in tax to align with their changing estimates which generated £320m gains. This total windfall of more the £1.2b was offset by tax payments exceeding forecast due, for example to greater-than-anticipated profits to give the £710m gain on the water firms' £960m corporation tax and group relief payments during 2010-11 and 2014-15.