Capital reorganisation? Now that's innovative

The boys from SBC Warburg who dreamt up Reckitt & Coleman's Special Foreign Income Dividend have been at it again. This time they have come up with a clever little wheeze for returning cash to investors in Yorkshire Water which manages to keep the taxman happy while discriminating as little as possible between different classes of shareholders.

The scheme SBC has devised is called "innovative" which is code for saying its advice was more expensive than usual. But who's counting when the reservoirs are 90 per cent full, shareholders are pounds 145m richer and God is in his heaven?

In order to return cash to shareholders and gear up the balance sheet, Yorkshire could have opted for a share buy-back or a special dividend - both of which are classed for tax purposes as income distribution and both of which favour large institutional shareholders.

What it has gone for instead is a capital reorganisation. And yet it is a capital re-organisation that amounts in effect to a share buy-back. Moreover it is one which allows all 50,000 small shareholders to participate and enables the institutions to count their cash as capital and not as income.

Here's how it works. Yorkshire splits its nominal capital into A shares and B shares and then offers to buy back the B shares at their nominal value at the same time as consolidating nine ordinary shares for every 10. Because this does not amount to a distribution there is no tax credit on either side of the deal - or leakage as the Revenue likes to call it.

The taxman is happy because the scheme is tax neutral. Furthermore it fits in with the spirit of what the Chancellor intended when he outlawed tax credits on special dividends and buy-backs last October.

Life companies and investment trusts which prefer to get their money in the form of capital rather than income are happy, now that the tax bribe of ACT credits are no longer available.

Finally so too are small shareholders who avoid having to pay higher- rate tax since they are not receiving income but can shelter instead behind their pounds 6,300 capital gains tax allowance.

So who loses? Well, as ever, the customer is the poor relation in all this. The average Yorkshire Water investor with 100 shares will be pounds 72 richer very shortly. The freeze in water charges that Yorkshire has agreed to under pressure from the regulator will leave its 2 million customers pounds 7 better off.

Whereas the water companies can afford the services of fancy investment banks, the only champion of the customer is Ian Byatt at Ofwat. He is one of the tougher regulators and has been making steady headway in ensuring that more of the efficiency gains being achieved by the industry are re- directed into consumers' pockets.

And yet as we report elsewhere in these pages, the best he could manage to extract from 12 water companies yesterday was pounds 1.30 off their bills this year. Sooner or later the dam will surely burst.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue