Camelot, the company behind the National Lottery, has avoided millions of pounds in corporation tax by exploiting a legal loophole that HMRC failed to close.
The company saved an estimated £10m in tax in the last two years through interest on loans taken from its Canadian owner via the Channel Islands Stock Exchange. Its owner is one of Canada’s largest pension plans, the Ontario Teachers’ Pension Plan board. The revelation comes as the National Lottery has doubled the price of its tickets to £2.
In the second part of a joint investigation by Corporate Watch and The Independent, it can also be revealed that HMRC considered closing the loophole that Camelot and others are using last year – but decided against it after lobbying from major accountancy and finance firms.
The Government estimated in 2012 that the loophole was costing the public purse some £200m, but publicly available accounts suggest the true cost could be more than £500m – and probably higher.
Camelot is one of more than 30 major UK companies that will be named in The Independent this week as benefiting from the legal loophole known as the quoted Eurobond exemption.
Margaret Hodge, chair of the Commons Public Accounts Committee, said last night she would be raising the issue at a hearing with HMRC on Monday. “I find it extraordinary that HMRC could be so naive as to send out a consultation document on closing a tax loophole to a group of vested interests, including some of the very people who benefit, or whose clients benefit, from it – and then accept their response seemingly without challenge,” she said.
Camelot could have avoided more than £10m in tax over the past two years after interest of £38.7m on £172.6m it owes to its owner, the Ontario Teachers’ Pension Plan, helped wipe out its UK profits. The loss meant the company declared a tax credit of £10.3m for 2012 and £5m the previous year. The savings will increase as more interest is paid or accrued in future years.
It is not clear exactly how much tax was avoided because Camelot will not disclose how much interest HMRC deemed suitable for tax relief. If its owners had invested the money in shares instead of debt, any dividends would be paid after tax.
HMRC would usually deduct a 20 per cent “withholding” tax on interest payments going overseas, making the tax savings from the interest deductions negligible. But as the loans are issued as “quoted Eurobonds” on the Channel Islands Stock Exchange, an exemption means they leave the UK tax-free.
The 12.5 per cent interest rate on the loans taken by Camelot is significantly higher than the 5 per cent average rate it is paying on loans from third parties such as banks.
A Camelot spokesman said: “The UK transfer pricing legislation exists to ensure the tax relief arising from transactions between connected parties are based on the internationally recognised ‘arm’s length principle’ (which ensures that such transactions are market-based). As a result, only a portion of the interest payable on the Eurobond debt issued by the group is eligible for UK tax relief, with the rest being disallowed for UK tax purposes.”
A spokesman for the Ontario Teachers’ Pension Plan said: “Ontario Teachers’ Pension Plan abides by all regulatory, tax and legal requirements in the jurisdictions that it invests and operates in.” A HMRC spokesman said: “For legal reasons, HMRC cannot comment on the affairs of individual taxpayers.”
Yesterday, The Independent revealed how nine care companies with lucrative government contracts were using the loophole.
Camelot: Millions made from creating millionaires
Camelot was awarded the franchise to run the National Lottery almost two decades ago and made its first prize draw on 19 November 1994.
The company was originally owned by a consortium of businesses including Cadbury.
It proved controversial from the outset due to the salaries and bonuses paid to its senior executives.
According to the National Lottery Commission, Camelot hands back 40 per cent of the money it makes from selling tickets and has invested £30bn in good causes, including the 2012 Olympic and Paralympic Games.
It has also given out over £40bn in prize money and created more than 2,000 millionaires.
In March 2010, shortly after winning its third franchise, Camelot was sold for almost £400m to the Ontario Teachers’ Pension Plan board, a pension fund that looks after the interests of 289,000 Canadian teachers.
Since then, the group has been forced to contend with the economic downturn as well as competition from Richard Desmond’s Health Lottery, which is a collection of regional lotteries promoted nationally.
Another test for the Lottery came in September when the price of its flagship Lotto draw was raised for the first time, doubling to £2.
The move is an attempt to tackle the fact that Lotto is in decline – sales have more than halved from its peak of £4.7bn a year.
Lottery firm’s owner has $130bn in assets
The Ontario Teachers’ Pension Plan board is not as unlikely an owner for Camelot as it might first appear. One of the world’s largest institutional investors, it has some $129.5bn (£80bn) in net assets, much of which is invested here.
It pays pensions and invests plan assets on behalf of more than 300,000 teachers in Canada.
Acorn Care – one of the care firms reported in The Independent as using the same legal tax loophole – is also owned by the board. A spokesman said: “Ontario Teachers’ Pension Plan abides by all regulatory, tax and legal requirements in the jurisdictions that it invests and operates in.”