Peston's Picks

Zero tax for Saga and AA

• Robert Peston
• 3 Jul 07, 07:30 AM

It is standard practice at all private-equity owned businesses to load up with debt, cut their taxable profits and therefore reduce their liability to corporation tax.

So the zero tax liability incurred by the AA and Saga – which collectively made earnings before interest, tax, depreciation and amortisation last year of £430m – is par for the course.

Nor are they likely to pay any corporation tax after they are merged later this year: interest payments by the enlarged business will probably wipe out taxable profits, since it is borrowing £4.8bn, significantly more than the combined debt of the individual companies of £3.3bn.

The impact of this kind of behaviour is to reduce the Government’s receipts of corporation tax – and the trends suggest that there could be a significant undermining of corporation tax.

Here’s why.

First, private equity firms are tending to own the firms they buy for longer than hitherto.

Second, public companies are slightly aping private-equity owned firms by borrowing more to increase returns to investors.

And you can dismiss the private-equity argument that the tax liability is merely transferred to those who lend to their companies. Some of these lenders pay tax in the UK, but in a globalised financial world most don’t.

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