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.

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