Boots' billion pound tax dodge

 | News and analysis
New research shows that Alliance Boots, the high street chemist and pharmaceutical giant, has avoided more than £1 billion in tax since it went private six years ago through taking on excessive debts, profit shifting and corporate restructuring.

This report, Alliance Boots & The Tax Gap, published by War on Want, Unite the Union and Change to Win, exposes the full scale of Boots' tax avoidance for the first time. 

At a time when Alliance Boots is trying to sell additional services to the NHS, the lost tax revenue from Alliance Boots has tangible effects on the British public. According to the report, Alliance Boots & The Tax Gap, using the tax Alliance Boots avoided, the government could have funded:

  • More than two years of total prescription charges for all of England
  • The starting salary of more than 78,000 NHS nurses for a year– roughly 120 additional nurses per parliamentary constituency.
  • Over 185,000 hip replacements
  • More than 5 million ambulance call outs

In 2007, Alliance Boots was bought out by a private consortium, led by US private equity firm Kohlberg Kravis Roberts & Co. (KKR) and Alliance Boots' Executive Chairman Stefano Pessina, a billionaire resident of Monaco. The buyout was financed largely with £9 billion in borrowings, more than 12 times the company's annual earnings. By taking on this staggering level of debt, Alliance Boots was effectively able to shift profits out of the UK.

While Alliance Boots operates in 25 countries, its more profitable retail business is mostly in the UK. Because all or almost all of the debt from the takeover was located in the UK, Alliance Boots has been able to deduct its costs of repaying these debts from taxable income in its most profitable market, the UK. During the six-year period since the buyout, we calculate that the company was able to reduce its UK taxable income by an estimated £4.2 billion compared to what it would have paid had it not carried any debt, resulting in a reduction of its tax bill by an estimated £1.12 to £1.28 billion.

This corporate behaviour, while legal, is particularly disturbing because Alliance Boots draws an estimated 40% of its UK revenue from health services largely paid for by the tax payer, and is seeking to expand the services that it supplies to the NHS.

The company and its affiliates have taken advantage of the low tax rates and privacy protections that come with location in tax havens. In 2008, Alliance Boots relocated to the low-tax jurisdiction of Zug, Switzerland, even though the company generates no revenue there. Several Pessina and KKR-related entities with stakes in Alliance Boots operate in other tax havens such as Gibraltar, Luxembourg, and the Cayman Islands. The limited financial disclosure that these tax havens require makes it difficult to determine beneficial ownership of companies that are related to, and in some cases, doing business with Alliance Boots, and how that impacts the tax payment by the company and its owners.

The government should require companies like Alliance Boots to disclose more information about the locations of their profits and tax bills. It should also place more effective limits on financing arrangements like these that are largely designed to avoid taxes.

In response to this report it is urgent now that there is:

  • full disclosure by Alliance Boots of key tax and financial information;
  • an HMRC investigation of Alliance Boots tax practices;
  • modernisation of taxation of private equity-backed business and debt financing;
  • implementation of registers of beneficial ownership and reform of financial and taxation regulations in British Overseas Territories to ensure they are no longer able to operate as tax havens;
  • implementation of measures for greater transparency and accountability in public contractor relationships.

UPDATE – 14 March 2014

Research by the anti-poverty charity War on Want and the US labour federation Change to Win triggered a complaint with the Organisation for Economic Co-operation and Development filed 28 November 2013.

The complaint alleges that Alliance Boots violated the OECD Guidelines for Multinational Enterprises through its inadequate disclosure about insider transactions which appear to have enriched Alliance Boots executive chairman Stefano Pessina at the expense of the company and UK taxpayers.  A draft initial assessment of the complaint by the OECD National Contact Point is expected before the end of March 2014.  The case could set an important precedent for the use of the guidelines to prevent tax avoidance practices.

War on Want and Change to Win made a submission to the House of Lords Finance Bill Sub-Committee (FBSC) which held an inquiry into the draft Finance Bill 2014 which was published on 10 December 2013.  Our submission drew attention to the corporate abuse of limited liability partnerships in order to facilitate tax avoidance, highlighting Alliance Boots' practices in relation to rental incomes.