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ALEX BRUMMER: Morrisons private equity takeover set to hit HMRC

As fascinating as the Pandora Papers leak on the tax affairs and property porn of Middle East monarchs, autocrats and Tony Blair may be, it hardly comes as a surprise.

There has already been mountains of this stuff, with the Panama Papers in 2016 and the 2015 disclosures of rum goings-on at HSBC’s Geneva private bank.

What ought to be of immediate concern to HMRC, the Treasury and the supine Morrisons board is the impact of the £7billion Clayton, Dubilier & Rice takeover of the Bradford-based grocer on its tax affairs.

Tax hit: Given that the interest rate costs of debt finance are chargeable against corporation tax, HMRC will be fortunate if it collects any from Morrison’s in the future

Instead of buying into the gung-ho excitement about the new ownership and potential bids for the UK’s other grocers, there needs to be a thorough look at the long-term impact of private equity deals and financially-driven ownership on the UK’s revenue base. 

As we know from previous high profile deals, such as the KKR-backed takeover of Boots and the Kraft deal for Cadbury, one of the early moves of the new owners was to switch tax domicile.

Even if, as CD&R has indicated, Morrisons continues to pay its whack of corporation tax in the UK, the bill will look very different. 

Before the transaction, Morrisons carried near £3billion of debt on its balance sheet. As a result of the bid that number will shoot up.

Given that the interest rate costs of debt finance are chargeable against corporation tax, HMRC will be fortunate if it collects any in the future.

That is not all. Everyone has rightly been encouraged that the person at the helm of the new Morrisons will be former Tesco chief executive Sir Terry Leahy.

His vision helped Tesco become a global player, although it was not shared by his cut-and-run successors.

It is known from B&M, which Leahy helped guide to the public markets, that the tax affairs of CD&R-nurtured enterprises are far from straightforward.

When B&M floated in 2014, it was revealed that domicile was in the Cayman Islands and founders Simon and Bobby Arora had set up shop in Luxembourg.

The locus of Morrisons, post-takeover, will also be in CD&R’s favourite haunt of the Cayman Islands.

In private equity ownership, the company and its executives benefit from ‘carried interest’ – a share of the profits – which are taxed at a far lower rate than income tax.

Imagine the taxpayer hit if Softbank and Koch-backed Fortress were allowed to buy Sainsbury’s or another supermarket chain.

Even if the intentions of private equity are good – to build and invest – the tax affairs of the industry are opaque, show an ethical vacuum and are antithetical to the public interest.

Community property

The billionaire Chu family which controls 71 per cent of Hong Kong-quoted Hopson Development Holdings is politically savvy.

A decision to acquire a 51 per cent stake in Evergrande Property Services for £3.7billion offers a lifeline to the stricken property outfit, weighed down by £224.3billion of debts.

It is the latest of the Hong Kong ‘poker pals’ to have decided that a helping hand is preferable to allowing Evergrande to sink into the China Sea, casting a pall over Hong Kong and mainland China real estate. 

Other local financiers providing some support include Joseph Lau of Chinese Estate Holdings and Henry Cheng of New World Development.

There is a great deal of self-interest in that none of the billionaires will be keen to alienate President Xi, who, under the cover of the pandemic, and in breach of the ‘one state, two systems’ settlement, is stealthily seizing the reins of power from the Hong Kong government.

The informal local rescue may ease the shock to China’s chaotic and byzantine £37 trillion banking sector. But is not a wonderful advertisement for Hong Kong’s freewheeling, capitalist future.

Bright spark

A ray of light for private investors who have remained loyal to Marks & Spencer throughout its travails dating back to Philip Green’s takeover effort in 2004.

In spite of current supply chain disruptions and cost-of-living concerns, an update on October 7 is expected to show a surge in core profits for the half and full year.

Let’s hope it doesn’t attract the unwanted attention of private equity ghouls.

Chairman Archie Norman would be in a delicate spot having recently accepted a £1.75million signing on fee from Bridgepoint to be its senior non-executive director.

Read more at DailyMail.co.uk