Another tax scandal

Npower has admitted it has not paid corporation tax in the UK for three years - just months after increasing prices by around 9%. The company made the admission to the Energy and Climate Change select committee. Npower reported a 34% rise in profits to £413m last year. The admission came as the "big six" energy companies were questioned by MPs over issues including profits and how they treat their customers.

Which was enough to get Labour MPs jumping up and down, particularly as the company had reported a total of £800m in the last five years.

But not so fast. Chief Executive Paul Massara said: "Effectively we have invested £5bn in the last five years building power plants, creating jobs, creating employment and helping to keep the lights on."  A company statement added: "Looking at RWE npower specifically, our investment programme since 2008 has amounted to almost £3bn, which means we have seen a large increase in tax relief.

Yes that's right £3bn of capital spending which as any fule kno, gives rise to capital allowances at the rate of 20% on a declining balance basis compared to the 25 year straight line depreciation charged to the accounts (i.e. 4% per annum). In other words the capital allowances in the first year alone will reduce the taxable profits compared to the accounting profits by 16% of the capital expenditure (20%-4%), in the second year by 12% (20%x80%-4%), in the third year by 8.8% (20%x80%x80%-4%), which in just 3 years makes 36.8% of £3bn, which is more than enough to wipe out the tax on £800m of profits.

So where is the scandal?  The scandal is that there are Labour MPs paid £65,000 a year (and the rest) drawing up and voting on tax legislation that they clearly don't understand.

Worse than that they don't understand why a company like nPower would be investing so much in new capacity. The Large Combustion Plant Directive (LCPD, 2001/80/EC) is a European Union directive which requires member states of the European Union to limit emissions from combustion plants with a thermal capacity of 50 MW or greater, which means that a large part of our generating capacity has had to be replaced.

The current directive was issued in October 2001.  I seem to recall there was a Labour government at the time.