Review presses Ofwat to tighten up sector tax rules after firms bag £710m windfall

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.