Vodafone has reacted sharply to the media reports which suggested the operator did not pay any corporation tax last year linking it to its group financing operations in Luxembourg, according to media reports.

The two issues are totally unrelated, a Vodafone spokesman told Dow Jones Newswires.

"Our U.K. corporation tax liabilities reflect statutory allowances for capital investment and interest costs and have nothing to do with our Luxembourg subsidiary," the spokesman said.

Vodafone said it makes it main contribution to the UK economy via investment rather than taxes.

“Last year, Vodafone’s UK capital expenditure went up from £516m to £575m which means we were spending about £1.5m per day on our UK network,” a Vodafone spokesperson told City A.M.

The company generates four per cent of its group operating profits in the UK, and said it paid the exchequer about £700m last year through payroll taxes and NI contributions.

“The UK law permits companies to offset interest costs and capital expenditure against profits and the telecoms industry is capital expenditure heavy,” said the Vodafone spokesperson.

Vodafone’s British corporation tax bill fell from £140m in the year to March 31, 2011 to zero, despite an increase in underlying earnings before interest and tax at its UK operation from £1.2bn to £1.3bn, according telegraph.co.uk.

Although Vodafone has acted within the law, its minimal bill in Britain is likely to reignite anger over the group’s dealings with the taxman. The business, based in Newbury, Berkshire, has already faced a barrage of criticism, after its £1.2bn settlement of a decade-long dispute with HMRC in 2010.

Vodafone paid no corporation tax on its U.K. earnings for the year to March 31 because the regional profit, which makes up just 4% of the group's profit worldwide, was offset by the interest and capital expenditure paid during the period, the spokesman added.

Meanwhile, the company continues to do a large part of its group financing via its subsidiary in Luxembourg, which was the subject of a GBP1.25 million settlement Vodafone made with the U.K.'s tax authority last year.

In its latest annual report, Vodafone recorded a total deferred tax asset of GBP1.16 billion in relation to losses at its Luxembourg subsidiary because, the company said, it expected the subsidiary to generate taxable profits against which the losses could be offset. It added that GBP791 million of the total deferred tax asset referred to the settlement it reached with the U.K. tax authority.