Drinks giant Allied Domecq today became the first big company to take advantage of a tax break that will not exist by April 7,1999.
It announced that it will pay its latest half-year dividend of 9.44p as a Foreign Income Dividend (FID), in order to reclaim tax paid overseas back from the Inland Revenue.
Paying an FID will save Allied £25m, but it means the company will not be able to offer share options of shares instead of cash, as it had intended.
The company said the change was necessary because of Gordon Brown’s decision to abolish the tax credit payable to pension funds on dividends in last week’s budget. That made normal dividends much less attractive, as pension funds can longer claim back the Advance Corporation Tax (ACT) paid on dividends by companies.
Allied defended the action by pointing out it had paid £72m in un-recoverable ACT over the last few years on profits earned overseas.
That £72m was paid on top of tax paid out in the countries where the profits were made, meaning the company was effectively taxed twice.
A spokesman for the company said: “We are not exploiting a loophole, we are taking advantage of a perfectly legitimate piece of tax legislation in order to maximise returns to our shareholders.”
He said the company had not decided whether to repeat the exercise over the next three years: “It’s something we’ll look at as the occasion demands. Obviously, we’ll look to keep our options open.”
EMI later followed Allied’s lead by announcing that it too intended to pay its latest dividend as a FID. The music group said it expected to recover £23.5m in ACT by paying its 22p final dividend in this way. A spokesman for EMI said: “We are not the first to do it and we won’t be the last.”
William Davies, an analyst at stockbroker Albert E Sharp, said EMI’s decision was “quite nimble footwork”. “Undoubtedly others would follow,” he said.
His prediction was endorsed by Jeremy Batstone, head of research at NatWest stockbrokers: “Companies ae all thinking about ways they can get round the abolition of the dividend tax credit without seeing a wholesale stampede out of their shares.”
“But it’s not an option that’s open to companies without appreciable foreign earnings,” he added.
John Whiting, a tax expert and partner at Price Waterhouse, said the trend towards paying FIDs was one that has been building up over the last 18 months, but would now be accelerated by the Budget changes.
“FIDs have been around for three years, but it’s only in the last 18 months that companies and shareholders have begun to get the hang of them,” he said. “I think it’s fair to say that we’ll see a lot of FIDs over the next 18 months,” he concluded.
PA News 10/07/97
