Three of Britain's biggest water companies paid little or no tax on their profits last year while generously rewarding their executives and investors.
Thames Water and Anglian Water paid no corporation tax on the profits made from their utility businesses while Yorkshire Water kept its payments to the Revenue in the low millions, according to an investigation by the Observer.
As the companies made hundreds of millions in operating profits they rewarded their senior executives with performance-related bonuses.
Martin Baggs , the chief executive of Thames Water, was awarded an annual bonus of £418,359 for the year to March 31 on top of his £425,000 salary, according to the company's annual report, after a year in which a hosepipe ban was announced and customer satisfaction "deteriorated".
Last night the water companies were accused of "highly questionable" financial arrangements by the deputy leader of the Liberal Democrats, Simon Hughes, who has written to the parliamentary authorities to demand an investigation.
He said: "The government should use its powers of licensing to make sure the companies behave in a responsible way to their customers and to society, which includes paying their taxes."
Thames Water which has 13 million domestic customers enjoyed a £76m tax rebate last year, despite making operating profits of £650m and warning of big future price rises, reports the Observer.
Thames has paid out £1.08bn in dividends over the past four years. It avoids tax by offsetting the interest payments on its debts against its tax liability and delaying it by claiming allowances on capital project spending. The company is seeking government support for a £4.1bn project to build a new "super sewer" under the Thames.
The Observer also reports that Anglian Water's cashflow statement for 2012 reports that the company paid no corporation tax on its regulated water business in the financial year ending in March. The company paid £500,000 corporation tax in the previous year and £1.4m the year before.
Anglian, which lent £1.6bn to a subsidiary company in the Cayman Islands in 2002, paid £478.1m in equity dividends to investors this year, including its subsidiary in the tax haven. Yorkshire Water, which made an operating profit of £303m in 2012, paid £2.9m in tax on its water profits last year and £11.1m in the year before, having increased the debt on its books recently, which offsets tax payments, reports the Observer.
A Thames spokesman said: "With nearly £1bn of deferred tax liability on our balance sheet, tax is being delayed, not avoided. We are structured in an efficient way in accordance with the tax system and the benefits from this flow through to Thames Water customers in the form of £1bn a year of essential investment while keeping bills among the lowest in the sector. All of the Thames Water group's active companies are resident in the UK and pay tax to HMRC."
A spokesman for Anglian Water said: "Tax is low because of the very significant capital investment that we are making (£2.3bn between 2010 and 2015). Under the UK's tax regime, we are entitled to capital allowances on this investment as an incentive to invest early. However, tax payable is only deferred, so looking at our future tax liability you can see that we will in time pay the tax in full. There is no tax avoidance here whatsoever. The intra-group loan system has no bearing on our tax liabilities."
Yorkshire Water did not respond to questions from the Observer.
The latest revelation of tax avoidance comes in the wake of a string of disclosures surrounding the small amount of tax paid by large international companies.
The UK business of Starbucks (NasdaqGS: SBUX - news) , the coffee chain, reported sales of £398m and paid nothing in tax because it made a £32.9m loss. The online retailer Amazon paid no tax in the UK in 2010 despite generating sales of more than £3.3bn.
Tomorrow the issue will again be in the public spotlight when Starbucks (HKSE: 4337.HK - news) , Google (NasdaqGS: GOOG - news) and Amazon all give evidence on the issue to the Public Accounts Committee.
Lord Myners, the former City minister, and Margaret Hodge, the chairman of the PAC which is carrying out its own inquiry into the issue said the Government should look into a sales tax as a way of raising extra tax revenue from global companies.
Lord Myners told The Sunday Telegraph that the current system for collecting corporation tax from multi-national companies (MNCs) is flawed.