Thames Water in tax row

The UK's biggest water company has admitted it paid no corporation tax for the last three years.

Thames Water, who saw revenues of nearly £2 billion and above inflation price rises, said they were not performing a "tax dodge" but were following the government's rules.

ITV News Business Editor Laura Kuenssberg, has been hearing how they do it.

Read: Thames Water has a 'clear conscience' over corporation tax

Writing in The Daily Telegraph, Ofwat Chairman Jonson Cox, has voiced his concern over water profits and taxation.

He said: "It has also been alleged that some companies use shareholder loans to avoid UK taxation.

"At the same time, hard-pressed customers have seen annual bills rise by 13.5pc since 2010-11, while their incomes have fallen.

"I agree that the dichotomy between profits and the prices charged to customers raises business, regulatory and moral questions."

A spokesman for Thames Water said: " We have not paid much corporation tax in recent years because the Government's tax system allows us to delay, not avoid, payment of tax based on how much we invest".

"Because we are investing £1 billion a year from 2010 to 2015, more than any water firm in the UK's history, we are able to defer a lot of tax payments to future years".

"The HMRC tax mechanism is called the capital allowance. Its aim is to encourage firms like us to carry out early and extensive infrastructure investment".

"If capital allowances did not exist it would mean one of two things: customers' bills would be higher, or Thames Water would invest less. As things stand we invest record amounts while our customers' bills remain the second-lowest in the sector, at less than #1 a day."

The UK's biggest water company paid no corporation tax and received £5 million credit from the Treasury during a year in which revenues hit £1.8 billion.

Thames Water made £549 million in underlying pre-tax profits as it raised bills by 6.7%, while customer satisfaction dipped and hundreds saw their homes flooded by sewage.

The figures come in the wake of criticism by Jonson Cox, chairman of regulator Ofwat, that the high profits and tax-reducing corporate structures of some water companies were "morally questionable".

Thames Water's profit for the year to the end of March was a 9% fall on last year, blamed on the freezing weather and rising levels of bad debt during the economic downturn.

But chief executive Martin Baggs still received a pay rise to £450,000 plus a £274,000 bonus. Next month he is in line to collect a further £366,000 as part of a long-term incentive plan.

Thames says its taxable profits are reduced by allowances on its £1 billion-a-year investment programme. Remaining gains are offset by tax losses claimed from other parts of the company.

It also said the combined bill for business rates and employee income tax and national insurance and other taxes was £150 million, while spending with suppliers and contractors boosted the wider economy.