Liverpool children’s hospital goes offshore
DESPITE George Osborne’s platitudes to last month’s G20 meeting in Australia – “It is not fair if big companies avoid their taxes by shifting their profits around artificially” – the Eye has discovered that the government has signed its most significant PFI deal to date (a new £190m children’s hospital at Alder Hey in Liverpool) with tax haven-based companies, thus conniving in precisely the sort of tax avoidance the chancellor was talking about.
The private finance initiative deal was signed last year with an innocuous-sounding company called Alder Hey (Special Purpose Vehicle) Ltd, which will be responsible for building the hospital and renting it back to the NHS, complete with support services, for 30 years, starting at £14m per year.
While the hospital will be nominally owned by this UK company, the profits it makes won’t remain on these shores for long. It is controlled through a series of holding companies by a consortium comprising John Laing with 40 percent, a group that now invests in infrastructure; Laing O’Rourke plc also with 40 percent, a building company that bought John Laing’s construction business in 2001; and services company Interserve.
No corporation tax
The most notable feature of the successful John Laing plc group is that for many years it has paid no corporation tax on its profitable investments. This is because it is not a quoted British company but entirely owned by a group called Henderson Infrastructure in, er, Jersey. This structure enables the group to, in Osborne’s words, shift its profits around to where they won’t be taxed.
Several other of its PFI deals show how it works: the PFI “special purpose” company pays interest at sky high rates, typically over 10 percent, on “shareholder loans”, removing any taxable profit. The UK company that receives this interest, John Laing Investments Ltd, then pays interest offshore so that it too has no taxable profits. The Henderson group gets its profits, but all shifted out of the UK tax net.
The Alder Hey company will make similar payments to Laing O’Rourke plc, along with payment for the building of the hospital – although this UK company does pay some tax on its UK profits. Not that Laing O’Rourke is a paragon of taxpaying virtue. It is owned by a Cyprus company, Laing O’Rourke Corporation Ltd, which achieves tax residence on the Mediterranean island by employing some local worthies as directors, including the former finance minister, Christakis Klerides, who in 2002 introduced the lax corporate tax regime from which his new employer now benefits.
This Cypriot company is itself controlled by a BVI company, Suffolk Partners Ltd, that is said to be controlled by a trust for the benefit of O’Rourke brothers Ray and Des, who established the firm in the 1970s and have projects like Heathrow Terminal 5 to their name. The arrangement is likely to be related to the tax advantages of Irish domicile and bears a remarkable resemblance to the set-up – a BVI company owned by offshore trusts – through which non-dom Lord Rothermere controls the Daily Mail newspaper group (Eyes passim).
The outcome of these offshore ownership arrangements is that far less tax will be paid on this (and other) PFI contracts than the Treasury assumes in determining that the contract is value for money. In concluding that using PFI for Alder Hey would be 1.75 percent cheaper than public borrowing, the NHS followed Treasury guidelines to assume that a ludicrously high 6 percent of the PFI payments (a large proportion of the profits) would come back to the government in tax. As a result, Alder Hey is now lumbered with an exorbitant PFI deal to go with its chronic clinical troubles (see last Eye).
The Treasury remains determined to stick with the tax fiddle even though it knows it is way off the mark, to justify PFI and secure its off-balance sheet advantages. In 2011 the then Treasury minister Justine Greening was questioned on the point directly by Labour’s Stella Creasey and refused to act, saying that “a more competitive system that does not drive companies offshore in the first place” was the answer.
PFI companies like John Laing are not going to stop using tax havens like Jersey however “competitive” Osborne makes the tax system, and the tax assumption will continue to bias investment towards a scheme, PFI, that as shadow chancellor he called “discredited”. Indeed it is, as are any claims to be tackling corporate tax avoidance and investing economically in healthcare.
Credit: Private Eye