Pennon Group Contributing to society through a responsible approach to tax - March 2021
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Pennon Group Contributing to society through a responsible approach to tax March 2021
Pennon Group Contributing to society through a responsible approach to tax
As one of Britain’s FTSE 250
UK-focused water infrastructure
groups, Pennon Group has assets of
c.£6.7 billion and a workforce of
around 1,900 people.
2
Pennon Group tax strategy
Contents
Foreword from Paul Boote, Group Finance Director 4
Our tax strategy 6
Our tax profile 8
Our total tax contribution 10
Our tax compliance and planning 12
Our relationship with tax authorities 16
Our tax risk management and governance 17
Customer engagement 21
Glossary23
This document no longer includes any references to the Viridor group or any financial data for that
part of the business, hence the figures included this year relate only to the continuing group.
Our values
Trusted Responsible
We do the right thing for our customers We keep our promises to our customers,
and stakeholders communities and each other
Collaborative Progressive
We forge strong relationships, working We are always looking for new ways to
together to make a positive impact improve and make life better
3
Pennon Group Contributing to society through a responsible approach to tax
Foreword I am pleased to provide our
2020/21 tax approach and
from position update.
Paul Boote, 2020 has been a year of significant change with the Covid-19
pandemic bringing challenges for people and businesses
Group Finance Director across the world. In addition, we have seen significant change
with the landmark sale of our waste management business,
Viridor in July 2020.
We continue to be a UK-focused water infrastructure group,
comprising South West Water and Pennon Water Services.
We are proud of the tax contributions that we are making.
In 2020/21 our taxes, borne and collected, resulted in a total
tax contribution of £120 million. Like any successful business,
we continue to work hard to be efficient and effective to
deliver the best possible result for customers, communities
and shareholders. We have the same approach when it comes
to tax.
As we all know, the huge support the Government has
offered to people and UK businesses is unprecedented. It
is the taxes paid by businesses and people which help fund
vital public services, investment in people and infrastructure
to support future growth, which benefits us all. We are
pleased to say that as a business we have not needed to
use any of the Covid-19 support mechanisms offered by
Government and have continued to pay our taxes in full and
on time throughout the pandemic.
4
Pennon Group tax strategy
Transparency remains a critical component of our approach, We continue to promote the wider adoption of best practice
recognising that openness and honesty with our customers principles in taxation. In 2020, we attended a virtual global
is essential. Optimising our tax position benefits them, for roundtable meeting with the United Nations as part of their
example, by keeping water bills down, but we do not enter future planning. The call for the Fair Tax Mark to become an
into artificial tax arrangements, use tax havens or take an international standard has now been taken forward as part
aggressive stance in the interpretation of tax legislation. As of their UN75 Roadmap for the Future. We had once again
a long-term business with a long-term approach to financial planned to co-sponsor the opening conference during Fair
management, there have been no changes to the Group’s Tax Week, using the opportunity to highlight why we adopt a
overall tax strategy this year compared to last. low-risk tax strategy, why we are open and transparent about
our tax affairs and pay our fair share but as a result of the
As a UK company, we pay corporation tax whilst utilising
pandemic this was not possible. We hope to be able to do this
Government incentives to invest in critical new infrastructure
in 2021.
to support the development of the wider UK economy.
Governments across the world encourage companies This document not only meets our legal obligation to
to invest in such infrastructure, and, in the UK, this is publish the Group’s tax strategy, but also provides us with
through the availability of capital allowances. This enables an opportunity to discuss the Group’s tax position and the
companies like ours to plan major investment effectively and contribution it makes to society in more depth than the
consequently maintain lower customer bills, as corporation legislation requires. The strategy and policies explored
tax relief is given against the investments made. overleaf are applied across the Group. As part of HMRC
governance processes, they will review what we say in this
We were the first water and waste business to be awarded
document to ensure it is reflected in our practices and
the Fair Tax Mark and we are delighted that we were
day-to-day operations.
re-awarded the Fair Tax Mark again in 2020. The Fair Tax
Mark is the UK’s accreditation scheme for businesses paying We hope you will find our 2020/21 update both useful and
their fair share of corporation tax and reporting on their easy to understand. We would welcome any feedback.
tax practices transparently. It demonstrates that we are
paying the right amount, in the right place (the UK) at the
right time and in the right way. Having taken the lead, we
have also inspired other water companies to apply for the Paul Boote
accreditation, thereby improving the tax transparency of the Group Finance Director
sector in which we operate. Pennon Group plc
5
Pennon Group Contributing to society through a responsible approach to tax
Our
tax strategy We are
committed to
The Finance Act 2016 having a robust
requires the Group’s tax
strategy in relation to UK and transparent
taxation to be reviewed and tax strategy
updated annually.
The Group’s overall approach to tax planning, risk
management and governance is outlined in the
following pages and is in line with the Finance Act
2016 requirements. This published strategy applies
for the year to 31 March 2021. The Group does
not expect its tax strategy to change significantly
year on year but it reviews and updates it annually.
Pennon is a sustainable business with a long-term
approach to financial management.
Pennon Group plc and its subsidiaries are
collectively referred to as “the Group”.
6
Pennon Group tax strategy
This means that we will:
1 At all times consider the Group’s corporate and social
responsibilities in relation to its tax affairs
2 Operate appropriate tax risk governance processes to ensure
that the policies are applied throughout the Group
3 Comply with our legal requirements; file all appropriate
returns on time and make all tax payments by the due dates
4 Consider all taxes as part of ongoing business decisions
5 Not enter into artificial tax arrangements nor take an
aggressive stance in the interpretation of tax legislation
6
Not undertake transactions which are outside the Group’s
low-risk appetite for tax or not in line with the Group’s
Code of Conduct
7
Engage with HMRC in a proactive and transparent way
and discuss our interpretation of tax laws in real-time, such
interpretations following both the letter and spirit of the laws
8
Not have any connections with tax havens unless
it is necessary for the purposes of trading within
those jurisdictions
7
Pennon Group Contributing to society through a responsible approach to tax
Our
tax profile
Whilst the Group has a number of
different legal entities, following the
disposal of Viridor in July 2020, its two
main operating businesses are South
West Water and Pennon Water Services.
Both are UK based businesses. Our tax
strategy applies to all entities in the
Group, which are all members of one
group for tax purposes.
South West Water provides water and wastewater services Pennon Water Services are business water specialists
to a population of c1.7 million in Cornwall, Devon and parts of providing water retail services for business customers’
Dorset and Somerset and water only services to c.0.5 million water management needs, serving customers across
in parts of Dorset, Hampshire and Wiltshire. South West England, Wales and Scotland. Pennon Water Services serves
Water is regulated by agencies including The Water Services national customers through the Source for Business brand.
Regulation Authority (Ofwat), the Environment Agency and Additionally it operates regionally as South West Water
Department for Environment, Food and Rural Affairs (Defra) Business, South Staffs Water Business, Bournemouth Water
and the Drinking Water Inspectorate. The tax strategy and Business and Cambridge Water Business.
processes for the Group are mirrored for South West Water,
which is considered separately for regulatory purposes.
8
Pennon Group tax strategy
The Group’s taxes, borne and collected, are made up of a
number of different types of tax and tax regimes. The Group
calculates its total tax contribution by combining its taxes
borne together with those it collects and remits on behalf
of the Government. These taxes can be grouped into the
following categories in order to improve clarity where these
taxes are borne and collected:
Environmental taxes (borne and collected) – These
encourage businesses and their customers to act in more
environmentally friendly ways. The Group makes payments
to the Environment Agency and other regulatory bodies
which reduce profit before tax.
Employment taxes (borne and collected) – Taxes on
employees’ salaries and benefits are collected by employers
through the Pay As You Earn system and National Insurance
Contributions and paid over to HMRC. Employers also bear
National Insurance Contributions on employees’ salaries and
benefits. The Apprenticeship Levy is also included within
employment taxes.
Business rates (borne) – This is a levy paid by businesses on
non-domestic property. It is a cost borne by the business and
reduces the Group’s profit before tax.
Profit taxes (borne) – These are the taxes a business bears
on its profits. The Group is subject to corporation tax on its
taxable profits*. The corporation tax rate is 19% for the year
to 31 March 2021.
Value Added Tax (VAT) (borne and collected) – This is a tax
charged on goods and services, which are either bought from
suppliers or sold to customers. The supplies of water and
wastewater are zero-rated for the majority of our customers, so
generally customers do not incur additional costs for VAT on
their water bills.
Further details of the Group’s tax contributions for 2019/20
are included in the Annual Report and Accounts 2020
and overleaf.
*No tax was due on the gain on the sale of Viridor, in accordance with UK
tax legislation.
9
Pennon Group Contributing to society through a responsible approach to tax
Our total tax contribution –
Our contribution to society through a
responsible approach to tax
Profit before tax £193m
£637 Revenue
m £104m Taxes borne
£16m Taxes collected
£120m Total tax contribution
Taxes borne includes all taxes which are
a cost to the group, such as business
rates, corporation tax and employer’s Top taxes
National Insurance Contributions on
employees’ salaries and benefits. Corporation tax Business rates Employment taxes
Taxes collected are those where the
business is acting as a tax collector
and includes employees’ National
Insurance Contributions and income tax
withheld at source. All figures relate to
the year ended 31 March 2020 for the
Continuing Group. £52m £29m £23m
10Pennon Group tax strategy
£120
Total tax contribution
m
for the year ended
31 March 2020
£1m £4m
Fuel excise Other
duty
£11m
Environmental
payments
£23m
Employment
taxes
£120 m £52m
UK corporation
tax
£29m
Business
rates
Total Tax Contribution
11Pennon Group Contributing to society through a responsible approach to tax
Our tax In the year ending,
31 March 2021, the Group
compliance …will file in excess of
and
planning 270
Capital allowances are given by UK Government
to encourage investment in infrastructure. different tax
The Group incurred capital expenditure during returns, and
2019/20 of £166m on assets, including the new
Mayflower Water Treatment works in Plymouth.
Tax relief on capital allowances of £20m was
claimed during the year on these assets.
…make over
The Group also continued to offer a
100
variety of tax efficient salary sacrifice
arrangements*, all of which are supported by
the UK Government. These aid and support
employee engagement and retention.
different tax payments
to HMRC
*Described in more detail on page 14
12Pennon Group tax strategy
In the normal course The Group does not enter into artificial tax arrangements
or take an aggressive stance in the interpretation of tax
of business the legislation. By the latter we mean we will not make use
of any loopholes or take “left-field” interpretations of
Group manages tax legislation.
its tax planning The Group ensures that its commercial business and
economic activities are carried out in a tax efficient manner.
efficiently for This is in line with the principles published in HMRC’s 2016
Framework for Co-operative Compliance. The Group seeks
the benefit of to ensure that all its tax obligations are fulfilled and that tax
its shareholders is paid where and when it is due.
The Group will apply relevant tax laws in a reasonable way
and customers. and in the spirit they were intended to apply.
Our Code of Conduct sets out the principles we believe
should guide our actions. We play a crucial role in the lives
of our customers and partners, who rely on us to make the
right decisions. The Code of Conduct requires decisions
to be legal, ethical and to stand up to external scrutiny.
All employees are required to follow the Code including
decisions which relate to tax.
Specific tax allowances, incentives and exemptions from
UK tax legislation are used by the UK Government typically
£6.7 bn
to support economic investment and employment. Where
these allowances are applicable to the Group’s activities,
the Group applies them in the spirit it believes is intended.
Asset base
13Pennon Group Contributing to society through a responsible approach to tax
Salary sacrifice Capital allowances are available when a business incurs
The Group offers salary sacrifice arrangements, which are qualifying expenditure on capital items such as infrastructure
fully supported by the UK Government, to its employees in assets. Capital allowances provide tax relief on these items in
areas which include the following: place of accounting depreciation which is not tax deductible.
• Payments into pension schemes Over the period of ownership of an asset, cumulative
• Childcare vouchers (no longer available to new depreciation and capital allowances will equalise. Capital
participants, instead employees can use the Tax-Free allowance rates are set by the UK Government and every
childcare scheme) business receives the same rate of allowance. Capital
• Cycle to work allowance rates vary from 3% up to 100% in certain instances,
with the majority of items qualifying for relief at either 6% or
Each of these arrangements is administered by specialist 18% per annum.
third party providers. The Group does not offer any
non-Government supported salary sacrifice schemes. For the year ended 31 March 2020, the Continuing Group
had capital expenditure of £161m. The Group claimed capital
Capital allowances allowances of £20m on eligible expenditure of £147m, giving
The Group also claims capital allowances on its qualifying a blended capital allowance rate of c.14%.
capital expenditure. With a significant asset base these
allowances are important to the Group.
14Pennon Group tax strategy
Construction of Mayflower Wastewater Treatment
works in Plymouth. Tax relief is available through
capital allowances on projects such as this, but
requires us to maintain a very detailed and thorough
analysis of what is being spent because the amount
of relief given depends on the type of expenditure.
15Pennon Group Contributing to society through a responsible approach to tax
Our The Group works with HMRC to enable them to understand
the tax risks the Group faces and how these are managed.
relationship
The same approach is taken for both routine and
non-routine matters.
We hold monthly calls with the Group’s Customer Compliance
with Manager at HMRC to provide regular updates on the
business and to discuss the tax implications of the Group’s
tax
commercial activities.
Due to the complexity of tax legislation, which sometimes
can be interpreted in different ways, the Group and HMRC
authorities may occasionally have conflicting opinions on the treatment
of certain tax items. Regular calls and meetings between
the Group and HMRC covering all of the Group’s tax affairs
enable potential tax issues and areas of uncertain tax
treatment to be highlighted at the earliest opportunity.
The Group engages with HMRC This enables the Group and HMRC to reach resolution as
promptly as possible.
in a proactive and transparent During the year, South West Water announced its
way to identify potential areas of Watershare+ scheme to customers. This gave customers a
£20 rebate, which could either be taken as a credit against
uncertainty in real time. future bills or as shares in Pennon Group plc as its parent
company. This is a new and novel way to offer customers
direct ownership through shares in the Group. As the first
Where differences of opinion listed company to do this, the tax treatment was uncertain.
As such, the Group requested clearance from HMRC of the
arise, the Group seeks to resolve tax treatment, so that it had certainty that the transactions
these in a co‑operative and were treated correctly for tax purposes from the outset
rather than waiting until tax returns are filed.
timely manner.
16Pennon Group tax strategy
Our tax risk
management
and
governance
The Board of Pennon Group
plc (“the Board”) has ultimate
responsibility for the Group’s
approach to tax and receives
regular updates on tax matters
and risks.
The Board is responsible for The Audit Committee is a sub‑committee of the Board
the Group’s strategy, risk and is responsible for ensuring the appropriateness
of financial reporting, reviewing and challenging
management and policies, the ongoing effectiveness of the internal control
including those in relation to tax. environment and reviewing and considering the scope
of risk management processes across the Group.
The Board aims to adopt a low-risk approach to tax
risk management.
17Pennon Group Contributing to society through a responsible approach to tax
Our tax risk management and governance
The diagram below sets out how the Group’s governance structure in relation to its tax affairs:
Day to day responsibility for the
Group’s tax affairs. Ensure all
Reports to the CEO and tax returns and payments are
responsible for the Group’s made on time and that the right
approach to tax amount is paid
Finance
Group teams across
Finance the Group
Ultimate Director (including Group
responsibility tax team)
The Board of for the Group's
Pennon Group plc approach to tax
and receives
(the Board) regular updates
on tax matters
and risks Audit Internal audit
Committee function
A sub-committee of the Reviews the Group’s internal
Board responsible for controls and processes
ensuring the Group’s and reports back on the
financial reporting, effectiveness of these to the
including aspects of tax, Audit Committee
is appropriate
Further assurance is provided by the Group’s external auditors that
the taxes borne and collected by the Group are reported correctly.
18Pennon Group tax strategy
The Board is responsible for identifying principal risks and The Group’s tax team is expected to:
ensuring appropriate risk mitigation is in place to manage • Maintain a tax risk framework
those risks effectively. The Board is supported in this by the
Audit Committee and a Group Risk Forum which provides
• Provide tax training and guidance to non-tax specialists
a ‘top down’ assessment of the Group’s risks. This is so that they have appropriate tax knowledge relevant to
supplemented by ‘bottom up’ risk assessments undertaken their role
by each operating subsidiary. The Group’s risk report within • Apply professional care and judgement when considering
its annual report and accounts contains more information on direct and indirect tax risks in line with the Group’s risk
the risk management framework. South West Water has its management framework
own board and audit committee which operate in the same • Thoroughly document and explain conclusions reached
way as those of the Group and adopt the same tax policies where tax risks are identified, ensuring there is a strong
and procedures. technical position for such conclusions
The Audit Committee receives detailed “deep dive” • Where appropriate, seek specialist external advice to
presentations from senior management on individual principal ensure tax risks can be managed effectively
risks which during 2018/19 included a review of the Group’s
provisions for uncertain tax positions. The two tax risks and details of how the Group manages
them are:
The Group maintains a register of tax risks for taxes borne
and collected, with material risks being discussed with I Complexity and changes in legislation
the Audit Committee and Group Risk Forum to ensure The Group is subject to a range of different taxes in the
adequate controls and processes are in place to monitor UK, each of which is governed by complex tax legislation.
and report against such risks. Risk reviews and “deep Such legislation is typically updated on an annual basis.
dives” are undertaken periodically across the different tax To keep up to date with these changes, the Group ensures
areas. The Board is regularly updated on tax matters and that its tax team is appropriately qualified and has access
any tax implications arising from commercial activities are to daily tax updates and specialist tax resources as well as
highlighted to the Board via a risk matrix to help assess the the opportunity to attend technical briefings. The Group
appropriateness of a proposal. The risk matrix considers also uses the services of external tax advisers as and
the strategic fit of any commercial activity against any risk when required.
factors, benefits and costs. II Compliance and reporting risk
The Group manages its tax risks carefully and accounts for The Group is required to meet many different statutory
areas of tax uncertainty in line with accounting standards filing and payment obligations. If these are not complied
requirements, where appropriate. with, the Group could incur interest and penalties as
well as an increased risk rating being applied by HMRC.
The Group uses a combination of tools to ensure that
all compliance and reporting obligations are met in
accordance with statutory deadlines.
19Pennon Group Contributing to society through a responsible approach to tax
Our tax risk management and governance
II Compliance and reporting risk Internal certification is also provided by the preparer
and reviewer of the different tax returns so that the SAO
The Group tax team works across the business to obtain
is satisfied that the Group meets its obligations under
the necessary commercial understanding of the Group’s
the regime.
operations and to obtain the financial information to ensure
that the tax computations and returns are complete and The Group’s Finance Director is responsible for the
accurate. Explanations are provided in the tax computations implementation of the Group’s approach to tax and reports
to assist HMRC in understanding the transactions and on this to the Pennon and subsidiary Boards and Audit
their tax implications. In addition, the Group aims to meet Committees on a regular basis.
with HMRC ahead of filing the Group’s corporate tax The senior management teams of the Group’s subsidiaries
computations so that it can explain the main areas and are responsible for ensuring that their businesses follow this
highlight transactions where HMRC may seek to gain a tax strategy and that processes and procedures are adopted
greater understanding, thus enabling the tax treatment to be and followed.
agreed proactively. In light of current Covid-19 restrictions, Examples of the day-to-day responsibilities for tax
as an alternative to meeting ahead of filing returns, a note operations of the Group are as follows:
highlighting key tax points will be submitted alongside the
a) UK Corporation tax – Group Tax Team
submission of the 19/20 tax computations which are due for
filing by 31 March 2021. b) Value Added Tax – Finance Directors of South West Water
and Pennon Water Services
Where there are points to be highlighted to HMRC with
regard to indirect taxes and associated returns, these are c) Employment taxes (Pay As You Earn/National Insurance
typically raised ahead of the returns being submitted. Contributions/Apprenticeship levy) – Group Human
Resources and Group Tax Team
Additionally, the UK’s Senior Accounting Officer (“SAO”)
regime requires the SAO to be able to certify that each d) Stamp Duty Land Tax – Group General Counsel
entity within the Group has appropriate tax accounting e) Other applicable tax matters (e.g. CIS returns) –
arrangements in place, thus focusing attention on the Finance Directors of South West Water and Pennon
processes and systems used as part of these arrangements. Water Services
Clearly defined and documented processes are followed for
the filing of tax returns. These are completed prior to the
returns being submitted to HMRC.
20Pennon Group tax strategy
95%
of customers surveyed
are broadly
supportive of our
Customer tax strategy
engagement
To assist the development of our tax strategy, we undertook As a result of this research, we have:
customer and stakeholder research via focus groups and • Been clear in the tax strategy document about our
through qualitative surveys. Key feedback included: approach to tax.
• Tax is a key aspect of corporate responsibility. • Sought to make the tax strategy accessible to all.
• The view that a company that gets its tax right is • Included real-life examples to demonstrate how the tax
highly likely to get other aspects of corporate social approach works in practice.
responsibility right.
Key priorities for our customers are:
• Companies should pay their fair share of tax.
The majority the Group’s
• Tax policies should be clear for everyone to understand,
of customers attitude to
not just tax experts.
surveyed tax planning
• There should be stronger legislation in place to ensure
that companies who provide services in the UK pay the thought that was acceptable
right level of corporation tax.
21Pennon Group Contributing to society through a responsible approach to tax
If more companies and individuals Society needs to be fairer,
paid their fair share of tax then there and to change for the better.
would be more money for public Female, 45-59, C2
services such as the NHS.
Female, 30-44, C1
...all I ask is that they are a
responsible company and that they
pay their fair share of tax, and to me
it looks as though they do that.
C2DE, 46+
22Pennon Group tax strategy
Glossary
Aggregates Levy A tax on the extraction of rock, gravel and sand. National Insurance Paid by both employers and employees primarily to
Apprenticeship Levy A tax on employers which can be used to fund Contributions (NICs) fund state benefits. Employee NICs are deducted
apprenticeship training. at source from an employee’s pay. Employer’s NICs
are a cost to the business and charged based on an
Artificial tax Involve carrying out or entering into an employees pay and benefits. All NICs are paid over
arrangements arrangement which is not a reasonable course of to HMRC.
action in relation to the tax provision(s) in question
or lacks economic or commercial substance. Pay As You Earn Income tax which is deducted at source from an
(PAYE) employee’s pay. This tax is paid over to HMRC.
Business rates A tax on non-domestic property.
Salary sacrifice An agreement to reduce an employee’s entitlement
Capital allowances Tax relief given when a business incurs qualifying to cash pay, usually in return for a non-cash benefit.
expenditure on capital items such as plant and Tax and NIC exemptions are available on the
machinery which are used by the business. As such following non-cash benefits:
the business is allowed to deduct some or all of 1. Payments into pension schemes
the cost of the item from its taxable profits over a 2. Employer provided pension advice
number of years, which reflects the fall in value of 3. Childcare vouchers, workplace nurseries
the asset from its use. and directly contracted employer
Carbon Reduction A tax on electricity and gas consumption, provided childcare
Commitment calculated by reference to the amount of associated 4. Bicycles and cycling safety equipment
carbon dioxide emission. (including cycle to work).
Where an employee sacrifices salary in return for
Climate Change Levy A tax on energy delivered to non‑domestic users.
one of these government supported exemptions,
Construction Industry A scheme whereby contractors are required to they save the tax and NICs on the sacrificed
Scheme (CIS) deduct money from subcontractors’ payments and salary up to certain limits set by the Government.
pass it to HMRC. The employer also saves employer’s NICs on the
Corporation tax A tax on the profits of the business. salary sacrificed.
Fuel Excise Duty A tax on fuel used in the business. Stamp Duty Land Tax A tax on the acquisition of land and property.
HMRC Her Majesty’s Revenue and Customs, the UK Tax advantage A tax benefit which runs contrary to the overall
tax authority. underlying commercial and economic transaction.
Insurance Premium A tax charged on insurance premiums. Tax allowances, Tax reliefs offered by the Government to encourage
Tax (IPT) incentives and certain behaviours and actions by business to
exemptions drive them to do specific things. For example to
encourage investment in capital expenditure, the
UK Government offers capital allowances.
Value Added Tax A tax levied on the sale of goods and services.
(VAT)
23 23This document complies with the Group’s duty
under Paragraph 16(2) of Schedule 19 of the
Finance Act 2016 to publish a group tax strategy
for the year ended 31 March 2021
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