Eurobonds scandal: The high street giants avoiding millions in tax


In the third part of our investigation into the biggest corporations in Britain, we turn to the stores that dominate our town centres. Many of Britain’s best-known high street chains are avoiding millions of pounds in tax through the controversial Eurobonds scheme.

Food chains including Nando’s, Pizza Express, Café Rouge, Strada and Pret A Manger have cut their taxable profits by borrowing from their owners through the Channel Islands Stock Exchange. High street retailers doing the same include BHS, the electronics retailer Maplin, Office and Pets At Home. The revelations form the third part of an investigation by Corporate Watch and The Independent into major UK companies using the quoted Eurobond exemption, a regulatory loophole the Government knows about but has decided not to close.

David Cameron is expected to be questioned today in Parliament about the scheme and HMRC’s failure to tackle it. Instead of putting their money in the shares of the companies they buy, the owners – mostly private equity funds – lend it instead. The interest on the loans cuts the UK companies’ taxable income each year and the exemption – triggered because the loans are listed on the Channel Islands Stock Exchange – means the interest goes to the owners tax free. Without this loophole, HMRC could deduct a 20 per cent “withholding tax” from payments overseas and the overall tax saving would be greatly reduced. Yesterday The Independent reported how Camelot had avoided tax using this method and how HMRC was lobbied by financial firms to keep the loophole open.

Murray Worthy, a tax campaigner with War on Want, said: “This isn’t just a niche issue that’s being used by a handful of companies. We’ve seen how angry people are about the ease with which these companies can avoid paying their fair share, [and] the only reason this is happening is because of the influence of big business on the Government’s tax rules.” Gondola Group – which owns Pizza Express, Zizzi and Ask – has avoided as much as £77m in UK corporation tax since it was bought by the Cinven private equity fund in 2006. Cinven loaned Gondola more than £300m at a 12.5 per cent interest rate but only invested £8m in equity. Instead of receiving the interest payments on the loans every year, Cinven has allowed it to accrue on the debt, compounding the amount taken off Gondola’s profits every year. When Cinven sells the restaurants, which it is reportedly considering, it can receive the £276.8m it is owed tax free.

Gondola’s UK corporation tax bill last year was only £200,000, after an operating profit of £39m. In 2011, it recorded a tax credit of £5.8m. Cinven also owns Spire Hospitals and Partnerships in Care – healthcare companies that The Independent revealed earlier this week were using the same arrangement. Pizza Express and Zizzi have previously been criticised for their poor pay. Pizza Express sacked a waiter who revealed the company kept 8 per cent of tips as an “admin fee” in 2009 while in the same year Zizzi staff were paid £4.25 per hour before tips were added. Gondola did not give more up-to-date information on its pay.

Tragus Group, which owns the Café  Rouge, Strada and Bella Italia chains, could have avoided more than £13m in tax after accruing £47.7m in interest on 17 per cent Eurobonds it owes to the Blackstone private equity fund, which owns the group through a Cayman Islands subsidiary.

The electronics retailer Maplin accrued interest of £68.9m in 2012 on borrowings from its owners, Montagu private equity. However, a spokesman argued that the majority of the interest cannot be taken off its tax bill following negotiations with HMRC. Interest of £361m has accrued over the previous five years, on top of the £137.5m it originally borrowed from Montagu at 16.5 per cent. It is unclear how much tax has been avoided because Maplin would not disclose the figures involved – or how long the interest had been disallowable for, but the potential savings could still be in the tens of millions.

Sir Philip Green’s wife, Lady Green, brought BHS into the family’s Arcadia group, which also owns Top Shop, by investing through the Channel Islands Stock Exchange in 2009. The group deducted interest of £13.5m from its taxable profits in 2012, avoiding £3m.

Pret A Manger owed £237.9m to its owner, the Bridgepoint private equity fund, at the end of 2012. The loans were listed with at a 12 per cent interest rate but a spokeswoman told The Independent that they were only allowed to deduct 45 per cent of the interest from their income with HMRC’s approval. They have since repaid £150m of the loans.

Tim Hames, director general of the British Private Equity and Venture Capital Association, said: “The retail sector is one which has suffered deeply since the financial crisis. But there are at last signs of a genuine recovery, much of it brought about by putting investment to work and creating value.”

A spokesman for BHS and Arcadia said the figures were accurate but gave no further comment. Tragus and Silverfleet Capital, which own Office, said they complied fully with all relevant legislation. Pets At Home said the company was acting within the law and had expanded its business.

Nando’s said that the loans were the most efficient way to accelerate its growth in Britain. “Nando’s Group Holdings Ltd incurred corporation tax of £10.4m on an operating profit of £41.9m in the year ending February 2012. Nando’s growth has been funded by a combination of equity and debt,” a spokesman said.

Gondola said it “works closely with HMRC to ensure that we pay the right taxes. Our structure is in line with a significant proportion of UK companies, in the high street and beyond.  We are also a substantial contributor to the UK, having paid £200m in taxes in the last three years, created 3,200 British jobs and invested £300m in the last 6 years”.

A spokeswoman for Pret did not dispute the figures but said it was “misleading” to call it tax avoidance. She said: “Pret pays a fair amount of tax given the business’s profit levels and its continued investment in growth, building more shops and creating more jobs. Our 2012 operating profits before interest were £22.5m and we paid £7.5m in tax.”

An HMRC spokesman said the department did not recognise that £500m was being lost: “The rules on cross-border withholding tax are being looked at as part of a package of work on the international tax rules.”