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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 by and – 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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