Why Vodafone paying no tax on a huge windfall is a good thing

Vodafone just has sold its 45% stake in Verizon Wireless to US telecoms group Verizon Communications in one of the biggest deals in corporate history.  The $130bn (£84bn) deal was announced shortly after the close of trading on the London Stock Exchange on Monday, 2nd September.  As chief executive Vittorio Colao simply explained: “We got an offer that we thought was in the interests of our shareholders to accept”.

Almost immediately, the question was raised as to whether Vodafone would, or should, be paying tax on the huge profit it made on the deal.  Margaret Hodge, chair of the Public Accounts Committee, was quickly onto the issue, demanding that HM Revenue & Customs look in detail at the deal “to make sure that Vodafone, under the existing law, is paying all tax due.”  She omitted to explain why she thought Vodafone might NOT pay all tax due, or why senior staff at HMRC might somehow overlook an extraordinary item in Vodafone’s accounts which broadly equates to the annual GDP of Hungary, but there it is.

In the event, no UK tax will, in fact, be payable on the deal and whilst this may cause La Hodge to gnash her teeth in frustration, I’m afraid she must direct any ire she feels at her own party.  Quite apart from the fact that the ownership of the US shareholding was held by a Dutch holding company, so that the gain was realized offshore, even if the UK company had owned the Verizon investment directly, no UK tax would have been payable because the last Labour government’s 2002 Finance Act introduced an exemption from tax on capital gains from “substantial shareholdings” held by companies.  Good work, Gordon; sorry Margaret.

But why IS this a good thing?  Well, for starters, a large UK tax bill would certainly have made the deal less attractive and if Mr Colao and his fellow Board members had deemed it against the interests of the Vodafone shareholders it would not have happened at all.  As it is, Vodafone will invest a large chunk of the money in developing its core business, of which a significant part is based in the UK.  Furthermore, the company will return £54bn to its shareholders, of which £22bn will go to shareholders in the UK, giving a timely boost to the UK economy, as happy shareholders cheerfully dispose of their personal windfalls.  In other words, much of the money will find its way into the UK economy anyway!

Carl Barwick – Tax Manager

Westbury Accountants and Business Advisors is an accountancy practice based in London. Westbury have been providing Accounting and Tax solutions to small and medium sized businesses since 1936. Talk to the team at Westbury on 0207 253 7272 or visit http://www.westbury.co.uk.