Controversy as Vodafone books £18bn credit from tax losses

Phone giant denies dodging tax as Luxembourg structure comes under fire again

Gideon Spanier
Wednesday 13 November 2013 01:00

Vodafone has triggered a fresh controversy over its tax arrangements after claiming a colossal £17.67bn in tax losses that helped its half-year profits rocket.

Much of the tax loss – £15.83bn – arose from its Luxembourg subsidiary which has been criticised in the past by anti-tax avoidance campaigners.

The mobile giant dismissed suggestions it was avoiding tax, however, and insisted the move "does not change the amount of tax we pay in cash anywhere in the world".

Pre-tax profit in the six months to September was £1.51bn but the deferred tax losses sent post-tax profit soaring to £15.71bn.

The FTSE 100 firm's decision to claim the historic tax losses – £15.83bn from Luxembourg and £1.84bn from Germany – risks turning the spotlight back on Vodafone's complex financial arrangements.

The company said it had accumulated the tax losses over many years. The decision to include them now was "triggered" by its £84bn sale of its 45 per cent stake in America's Verizon Wireless.

The chief financial officer Andy Halford said "accounting rules require us to put a value on the balance sheet" given the change to the group because of the Verizon deal. He said Vodafone was not trying to avoid corporation tax by claiming the tax losses. "It's nothing to do with it. It's all perfectly above board."

He said the claim goes back to Vodafone's £110bn purchase of German operator Mannesmann in 2000 that led to the British group taking huge writedowns in subsequent years. "They are losses that have been agreed with the tax authorities and have been disclosed in our annual reports. It puts a value on what's already been there. It doesn't change the amount of tax we've been paying recently."

A Vodafone spokesman added that the "deferred tax asset" was "purely an accounting change" and it would not cut its tax bill in future. "International accounting rules insist that we must now recognise our historic losses all in one go," the spokesman said. "This has no impact at all on our tax situation in the UK."

However, in a sign of confusion, even City analysts at investment bank Berenberg said in a note to clients they understood Vodafone's tax bill would fall, "although at present we are not sure we understand why".

It is common practice for companies to accumulate tax losses for years before deciding when to "utilise" them. But one leading accountant, who asked not to be named, said Vodafone's £17.67bn tax credit would attract attention because "it's such a big number from a very important company".

Taxation is a sensitive subject for Vodafone which has repeatedly come under fire for basing some of its operations in low-tax Luxembourg and paying no corporation tax in the UK for the last two years. The group has also faced controversy in Britain over a tax deal with HM Revenue & Customs, and it continues to battle with Indian authorities.

The results showed Vodafone had earnings before interest, tax, depreciation and amortisation of £585m in the UK in the last half-year, with a corporation tax bill of just £5m. Vodafone will also pay only around £3bn in tax on the Verizon Wireless sale under the "substantial shareholding" rule.

A "brutal" market in southern Europe sent sales in the last quarter down 4.9 per cent.

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