BT would query competition issue

British Telecom may challenge the legality of the windfall tax, to be revealed in next Wednesday's Budget, on competition grounds because its main UK competitor, Cable & Wireless, is unlikely to be included.

The deliberations emerged as privatised utilities and City analysts yesterday predicted the Government would raise pounds 5bn from the windfall tax, but continued to disagree about how the levy would be calculated.

Analysts said the indications from the Treasury disclosed to the companies during the consultation process, that the tax would be simple to calculate using a formula in the Budget announcement, would leave British Telecom with a bill of at least pounds 1bn. The figure would almost certainly force the company to carry out its threat to test the legal basis of the tax, which will be used to pay for the pounds 3bn welfare-to- work programme.

BT is understood to be considering a legal challenge on competition grounds, arguing Mercury, C&W's UK subsidiary, should also be hit. "If BT has to pay the tax and our main competitor, in the form of Cable & Wireless, doesn't, it would be anti-competitive. If we have to pay then Mercury should be included as well," said a source.

Though C&W was one of the first of the Thatcher government's privatisations, most analysts have excluded the group from their calculations. They argued Mercury, which began operations in 1986 and has now merged into C&W Communications, has never had enough customers to qualify as a "utility".

Research published yesterday by Credit Lyonnais Laing suggested BT would pay pounds 1.16bn if the windfall levy was based on total returns for investors, above the average in the stock market as a whole, in the first three years after the 1984 flotation. The simplest scenario, based on the increase in share prices on the first day of trading, would see BT paying half the pounds 5bn bill.

A spokesman for the company yesterday denied suggestions that executives were "expecting" a pounds 1bn tax. BT shares dropped 6.5p on the speculation, to 449p. "Our directors are not expecting anything," the spokesman said.

Though the Treasury has kept details of the tax a closely guarded secret, officials have told several utility companies that the amount each business would pay, although not directly disclosed in the budget announcement, would be "simple" to calculate.

One group explained: "We were told in our session that we will know how big the bill is from the formula given on the day. That would seem to suggest something simpler than shareholder returns which require you to do analysis to take into account special dividends and buybacks."