Tax

While operating in compliance with our tax strategy and policies which require full compliance with both the letter of UK tax law and its application as it was intended, Yorkshire Water has not been required to pay any corporation tax in recent years. There are three main reasons for this corporation tax position, which we explain below.

a) Under UK tax law the starting point for calculating taxable profit is “profit before tax” as shown in the profit and loss account in the statutory financial statements. Profit before tax is arrived at after deducting all interest costs incurred on the company’s borrowings.

Yorkshire Water has borrowed significant sums to invest in infrastructure and improve water and waste water services to meet customer expectations and legal requirements. Customer bills have been kept low by borrowing this money rather than asking customers to pay up-front.

In accordance with UK tax law, interest costs on these borrowings are tax deductible. These interest costs reduce our taxable profits and the reduction in tax payable due to the interest directly incurred by Yorkshire Water is reflected by a reduction in customer bills.

b) UK tax laws also require that a further adjustment be made to profit before tax. This is because UK tax law does not allow a tax deduction for depreciation as it has been charged in the financial statements, but instead allows a tax deduction for what are known in UK tax law as "capital allowances".

As owners of essential infrastructure, our assets are significant. In the past, due to the rate at which capital allowances are given under UK tax law, we have received a timing benefit that has reduced our taxable profit. The benefit of capital allowances only delays the tax payable and that ‘delayed’ amount is set aside in the accounts in the deferred tax position.

c) Under a long established UK tax law concept known as "Group Relief", Yorkshire Water can offset tax losses of other Kelda Group companies against its taxable profits, including those interest costs incurred by other Kelda Group companies.

The Kelda Group was purchased by its shareholders in February 2008, choosing to partly fund their acquisition with bonds (debt). These bonds were issued via Kelda Eurobond Co Limited. This company is incorporated and resident for tax in the UK. Historically, the interest on Kelda Eurobond Co Limited debt was deducted from our taxable profits, however, this is no longer the case under the UK’s Corporate Interest Restriction rules. Interest on other indebtedness of intermediate financing companies will continue to be deducted from our taxable profits.

Some of the Group’s bonds meet the eligibility requirements of HMRC’s "quoted Eurobond exemption". This enables companies and investors to avoid the practical and administrative issues of having to reclaim from HMRC the tax withheld on the interest that is paid on these bonds if that tax has also been paid in their resident country for tax. It is therefore an incentive to invest in the UK as it is designed to reduce administrative burden or “red tape”.

The bonds are listed on The International Stock Exchange in the Channel Islands, TISE. TISE is a stock exchange recognised by HMRC for the purposes of the quoted Eurobond exemption. These bonds are listed on TISE rather than the London Stock Exchange (LSE) for ease of administration. Since the bonds are not traded, the greater administrative requirements imposed by the LSE are not necessary.

Further detail of our corporate taxation and deferred tax accounting are set out in our financial statements.

Yorkshire Water is the main company within the Kelda Group.

Yorkshire Water Financing Group (securitisation)

Yorkshire Water established a financing structure known as a Whole Business Securitisation (WBS) in 2009. The WBS enhances the creditworthiness of Yorkshire Water by setting strict rules to  give  long-term lenders confidence that the Company is a safe and reliable business in which to invest. Therefore, Lenders have been more prepared to lend to Yorkshire Water at lower rates of interest than would otherwise been the case.

The WBS works by placing a protective ring-fence around Yorkshire Water’s business that includes the way it operates, the way it trades with other group companies outside the WBS, and the way it finances itself. The protections include limits on borrowings, dividends and the ability to lend money to other Kelda companies. The protections also require profits to more than cover the amount of interest that Yorkshire Water pays, thereby providing assurance that the Company can service its debt.

All the companies within the WBS ring-fence are incorporated in England and Wales and are wholly and exclusively resident for tax in the UK. Yorkshire Water Finance Plc is the principal financing company for Yorkshire Water and holds corporate debt issued since the establishment of the WBS. Yorkshire Water Services Finance Limited is a legacy financing company that holds debt issued prior to the WBS being established.  In both instances, funds raised from debt issuance have been on-lent to Yorkshire Water Services Limited to fund its operating and capital requirements.

Other active Kelda Group companies

1. Those operating and resident for tax in the UK

The following Group companies operate in the UK and are wholly and exclusively resident for tax in the UK:
- Loop Customer Management Limited (Loop) – delivers customer service support to Yorkshire Water that includes billing, debt recovery and incident management; and
- KeyLand Developments Limited (KeyLand) – manages the Group's surplus property assets, either on its own or in partnership with outside organisations.
- Kelda Transport Management Limited - provides operating license compliance and provides safe and efficient practices for Yorkshire Water's fleet of Large Goods Vehicles.

2. Those incorporated overseas and resident for tax in the UK

The Group contains one further company incorporated in an overseas jurisdiction but which is wholly and exclusively resident for tax in the UK, namely Yorkshire Water’s ultimate parent company, Kelda Holdings Limited. The company is incorporated in Jersey to allow greater choice as to the manner in which distributions can be made to shareholders.

Further details of Kelda Group's tax policies can be found here