Since 2010, the average household water bill has increased by 14.5 percent. Indeed the average family has seen their overall utility bills rise by £384. Yet while jacking up our bills on the one hand the water companies have been indulging in serious levels of tax avoidance on the other.

Over the past three years, a number of utility companies have used tax avoidance schemes – based on debt tax relief – which has substantially reduced their tax liabilities. Companies like Yorkshire Water and Thames Water. My study demonstrated that this tax avoidance has potentially cost the Exchequer almost £1 billion in the past three years. In my view industrial scale tax avoidance of this nature is unethical, unacceptable and irresponsible.

It is unacceptable because water is both regulated and a public service monopoly. They don’t use their tax avoidance proceeds to increase investment as they like to claim. Investment has in fact been falling. The regulator, OFWAT, should immediately launch a review into these practices and order the tax avoiders to cut water bills.

It is unethical because the companies concerned get tax relief twice for the same investment. They first get tax relief on the investment from capital allowances. Then, as they make around 80 percent of the investment through debt, they get tax relief on the interest payments. The rates of interest charged may be well in excess of normal market rates, increasing the amount of tax avoided. Invariably the debt and share equity is provided by the same overseas investor, increasing investor returns. Often the investor is a non UK pension fund providing the debt through the Cayman Islands tax haven. For this reason, HMRC should launch a review into these practices and consider what action can be taken.

It is irresponsible because these companies have become heavily indebted in order to make their tax avoidance work. Typically the debt levels are 80 percent or more. A few are near 100 percent indebted on some measures. Excessively high levels of debt plunged our banking system into crisis and required the banks to be bailed out. Like banks, we cannot have a situation where our water companies are allowed to fail. Unlike banks we are not yet at a point of crisis and we should act now to ensure that the irresponsible behaviour of water companies doesn’t end up requiring a bailout in future. OFWAT as the regulator has a responsibility to ensure that our water companies are stable and sustainable. That they are able to finance the investment required to modernise our water infrastructure. Basically to ensure there is no risk they will go bust. This is why OFWAT needs to stop the culture of excessively high borrowing in the water industry.

Tax avoiding water companies should be ordered to cut their bills. Yet the water industry needs to improve its corporate culture too. It needs to have a greater sense of social responsibility to the tax payer and the customer. The industry needs to reduce its sky high debt levels and operate in a safer way, not live life on the corporate edge. The bottom line in that water is an essential supply and the industry needs to operate in a low risk way.

Tags: Consumer affairs, ofwat, utilities, water