The owners of Britain’s largest water companies used offshore tax havens as they loaded up the firms with £24bn of debt.
Thames Water, Anglian, Southern and Yorkshire Water – which jointly supply almost 30m people – are billions of pounds in the red and paid no corporation tax last year.
Critics claim their debts were racked up by owners to drive down tax bills and extract huge profits.
The Paradise Papers have shone a light on the use of offshore tax havens by the rich and famous – but they are also popular with utility firms.
Thames, Anglian, Southern and Yorkshire all used offshore firms to borrow money. In total from all forms of financing, Thames now owes £10.5bn, Anglian owes £6.8bn, Southern owes £3.5bn, and Yorkshire owes £3.7bn.
Utilities financing expert Martin Blaiklock said: ‘How much of that cheap money has just been going straight into the pockets of the owners as opposed to benefiting the customers?’
The four firms set up subsidiaries in the Cayman Islands more than a decade ago to get around rules in the UK preventing them from raising cash on the bond markets. Although those rules have since been scrapped, many continued to use the offshore firms.
Often interest payments made through havens do not incur tax as they would in the UK.
Analysis of accounts by the Mail suggests money has been lent between different parts of the companies, generating interest payments that reduce taxable profits.
Southern Water Services Ltd paid £133.6m in interest during 2016-17 to Cayman subsidiary Southern Water Services (Finance).
Southern Water Services Ltd ended the year with an £84.9m tax credit.
Thames Water Utilities Ltd paid £356.8m on interest on inter-company loans and ended up with a tax credit of £70.3m. The firm has paid no corporation tax since 2006.
Anglian Water Services Ltd paid £286.5m in interest to subsidiaries while earning £192m in interest from other parts of the company. It ended the year with a tax credit of £37.9m. Anglian Water group has issued bonds via a UK company with a Cayman holding company it says is dormant.
Yorkshire Water Services Ltd paid £198m interest on inter-company loans and ended up with a £101.5m tax credit.
Thames’s former owner Macquarie and fellow shareholders paid themselves £2.6bn in dividends between 2006 and last year, while the firm faces huge fines for leaks. Water firms stress they are allowed to delay corporation tax to encourage investment. Anglian said it had invested £1bn in the region and paid £210m in taxes.
Ofwat, the water regulator, is unhappy about the offshore structures, warning the sector faces a huge crisis of public trust.
It also wants companies to bring debt down, and is expected to introduce tougher rules on the amount they can charge customers.
Aileen Armstrong, senior director for finance and governance at Ofwat said: ‘It’s clear that many people don’t like the idea of public monopoly utility companies relying on complex financial arrangements.’ Yorkshire Water says it plans to close its subsidiary. Thames and Anglian have also indicated they might do so.
A Thames Water spokesman said both Thames and its Cayman financing company were resident in the UK for tax purposes.
He said: ‘There is no tax benefit associated with the companies being registered in the Cayman Islands and the companies operate and are managed wholly from our UK office.’
An Anglian Water spokesman said its Cayman firm is dormant and serves no purpose.
He added: ‘As Anglian Water has always been registered in the UK for tax, it therefore does not, and never has, benefited from any tax advantage from this.’
A Southern Water spokesman said the firm is resident in the UK for tax purposes and that ‘there is no tax benefit’ to its Cayman Islands structure.
Yorkshire Water said it was taking steps to remove unnecessary offshore structures and pays all tax in full.
Finance director Liz Barber added: ‘Our policy is not to enter into transactions that have a main purpose of gaining a tax advantage and not to make interpretations of tax law that are opposed to the original published intention of the law.’