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Allowable interest and capital allowances reduced Vodafone tax bill

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Vodafone faced ‘fresh controversy’ according to press reports after it emerged that the group has no UK corporation tax liability for the year to 31 March 2012 despite having 19m UK customers. But the company said the lack of a liability was ‘solely down to’ the cost of borrowings and capital allowances, which corporation tax rules allow as deductions in arriving at the taxable profit.

Vodafone also said that, contrary to reports, Luxembourg was ‘totally irrelevant’ to its UK tax position. A spokesman told Tax Journal today: ‘Vodafone pays tax in every country in which we operate: for every £4 we make in profit, we pay £1 in corporate taxes around the world.’

The group has more than 400m customers worldwide. The preliminary results published on 22 May show that for the UK operation, earnings before interest, taxes, depreciation, and amortisation were almost £1.3bn. The adjusted operating profit was £402m.

Under the headline ‘Vodafone faces new tax scandal’, The Sunday Times reported that the company’s UK corporation tax bill ‘fell from £140m in the 12 months to 31 March, 2011 to zero in the year just ended’. The paper said: ‘Vodafone reduces its taxable income in Britain by funneling loans through a subsidiary in Luxembourg. Interest payments on the loans cut its taxable profits in Britain, and allow it to benefit from lower rates in Luxembourg.’

Alex Brummer, City Editor at the Daily Mail, claimed yesterday in a comment piece that Vodafone was ‘rather too clever for its own good with its tax affairs’. In the UK, he wrote, the company ‘has found ways of paying as little, if any, corporation tax as possible’.

But The Sunday Times report added that Vodafone ‘said that Britain accounts for less than 4% of total profits and that it paid the exchequer about £700m in payroll and other taxes last year’, and yesterday The Times quoted a Vodafone spokesman as saying: ‘Luxembourg is totally irrelevant to our UK tax liabilities. The lack of UK corporation tax is solely down to the cost of borrowings and capital allowances in the UK, which exceed our trading profits in the UK.’

Capital expenditure in the UK rose from £516m in the year to March 2011 to £575m in the year to March 2012. Vodafone’s global tax liability amounted to £2.3bn and the group reported an effective tax rate of 25.3%.