Here's how Green milked the high street chain for all it wasn't worth
As Parliamentary Committees get ready to question Sir Philip Green over his stewardship of BHS, a recurring question is what returns have the Green family made from the ownership of BHS from 2000 to 2014?
A definitive answer is difficult because the Green family conducts business through a labyrinth of companies, some of which are in offshore tax havens and do not publish accounts.
There are a number of intragroup transactions which shift profits from BHS to other entities under the Green family control, but the full details are not known. A figure of about £930 million can be estimated from the accounts.
In May 2000, Sir Philip Green bought BHS for £200 million. At that time the employee pension scheme had a surplus. BHS remained under Green’s ownership until March 2015 when it was sold for £1. The pattern of pre-tax profit/(loss) for the entire period is shown below.
Year Pre-tax Profit/(Loss)
2009 ( 62,109)
2010 ( 7,238)
2011 ( 76,056)
2013 ( 69,612)
2014 ( 85,117)
The important thing to note is that BHS reported profits of £498,344,000 from 2001 to 2008, and losses of £416,139,000 for the period 2009 to 2014. The overall profit for the entire period was £82,205,000.
For the period 2002 to 2004, BHS paid dividends of £423,035,000, mostly to the Green family. The pension scheme had a deficit of £76.6 million in 2003, rising to £80.8 million in 2004 and £139 million in 2014. So the priorities of the Green family become self-evident.
In 2001, BHS entered into a sale and leaseback agreement with another company under the control of the Green family. Twelve BHS properties were sold for £105,875,000 to Jersey-based Carmen Properties Limited and then immediately leased back.
Of course, the properties remained under the control of the Green family. Between 2001 and 2015, BHS paid rents totalling £157,398,000 to Carmen. In effect, one Green controlled company was paying rent to another company under the same control.
Carmen would have been able to pass on the bulk of £157 million to its controllers tax-free as Jersey did not levy any tax on that income. BHS would have been able to reduce its taxable profits by £157 million and lower its tax liabilities.
For the period 2005 to 2012, BHS rented a property from Mildenhall Holdings Limited, another Jersey-based company under the control of the Green family. BHS paid rents of £2.8 million, most of which would have been passed on tax-free to the Green family and also reduced BHS tax liabilities.
In 2001, BHS issued a bond (i.e. borrowed money) of £19,500,000 to Jersey-based Tacomer Limited, another company under the control of the Green family.
The bond carried interest at the rate of 8 per cent and was redeemed in 2005 for £28,975,000, i.e. BHS paid interest of £9,475,000 which would have been tax-free in the hands of the recipients and also reduced BHS’s UK tax liabilities.
In 2009, parts of the Green business empire were reorganised. BHS now became a subsidiary of Taveta Investments (No. 2) Limited, itself a wholly-owned subsidiary of Taveta Investments Limited, all under the control of the Green family. Taveta Investments (No. 2) Limited paid £200 million.
How did it acquire that? It issued a bond (i.e. borrowed money) on the Channel Islands Stock Exchange to companies controlled by the Green family. In other words, the Green family lent money to one of its companies so that it can buy another company under its control.
Between 2009 and 2015, a capital sum of £20 million was repaid each year. The interest payments for the same period were £68,111,000. How much of that was borne by BHS is not clear.
Once again, the transaction generated tax benefits for the Green family. Media reports suggest that with the demise of BHS, some the remaining balanced of this bond may have been written-off by the Green family.
Until 2009, BHS paid most of its own administration and distribution costs. These were between 3.5 per cent and 3.99 per cent of its turnover.
Then in 2009 it all changed as BHS controllers decided to centralise the services and Arcadia Group Limited, another company under Green family control, billed BHS a share of those services.
For 2009 to 2014, BHS’s administration and distribution costs ranged from 7.07 per cent to 8.58 per cent of turnover, i.e. the costs suddenly doubled.
For the period 2009 to 2015, Arcadia billed BHS £295,181,000, which is double the BHS rate before centralisation of services. These arrangements shifted about £148 million of profits away from BHS to Arcadia.
Sir Philip Green is likely to have been the highest paid director at BHS and in that capacity may well have collected around £17 million in remuneration.
Right at the start, this article noted that BHS made cumulative losses of £416,139,000. These losses are not deadweight because in principle they can be offset against the taxable UK profits of other Green entities.
The value of losses depends on the prevailing corporation tax rates. The UK corporation tax rates have varied from 28 per cent in 2009 to 23 per cent in 2013/14.
Assuming an average corporation tax rate of 25 per cent, the tax loss of £416 million (partly the outcome intragroup transactions) could have reduced Arcadia’s tax bill by £104 million and thus boosted the value of that company and the wealth of Green family.
Of course, it would be argued that upon sale of BHS, Sir Philip and his family wrote-off substantial amounts of loans.
Nevertheless, legislators should be concerned about excessive returns and financial engineering that has left thousands of past and present employees in the lurch.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
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