The Government yesterday decided to give a much higher proportion of the proceeds of the pounds 3.5bn Grid sale to electricity consumers than to taxpayers.
Instead of the expected return to the taxpayer of up to pounds 1bn in capital gains tax on the profits the regional electricity companies have made on their five year ownership of the National Grid, the net proceeds for the Inland Revenue are likely to be pounds 500m or less.
This suggests the Government has come down heavily on the side of pleasing electricity consumers to offset the damage done to the image of privatisation by the rows over high salaries and soaring profits.
The alternative, of feeding more of the proceeds of the grid sale into wider tax cuts in the Budget, would have required a considerably lower consumer rebate than the pounds 50 agreed last night.
There were strong denials both from the Recs and from government ministers that there had been any 'behind the scenes' agreement to drop a windfall tax on the utilities in return for the deal.
The reduced tax take is mainly because the capital gains tax on the regional electricity companies' profits on the grid sale will be offset by lower corporation tax payments on the reduced profits that result from the consumer rebate.
The capital gains tax charge will also be lower than many predicted, because the value of the grid when it was given to the recs at the time of their flotation in 1990 emerged yesterday as pounds 1.2bn to pounds 1.6bn rather than the range of pounds 780m to pounds 1bn shown in the accounts.
Bryan Townsend, chairman of Midlands Electricity and a non-executive director of National Grid said the published figures for the value of the grid in 1990 were accounting numbers that bore no relation to the valuation the Inland Revenue is likely to put on the grid when it assesses capital gains tax.
The expected proceeds of the sale at pounds 3.4bn to pounds 3.5bn will be after a special dividend to the recs of about pounds 900m to compensate them for the extra tax bill.
The flotation will be by a listing and there will be no sale of new shares because most of the recs will be simply giving grid shares to their existing shareholders.
Negotiations on Wednesday were held up by last minute rows over the fate of shareholdings owned by Hanson, which has taken over Eastern, and Southern Electric International, which has taken over SWEB.
Both companies are believed to have wanted to hang on to their stakes but Tim Eggar, the industry minister, insisted they agreed to reduce their holdings in the grid to a negligible level within a year before the flotation could go ahead.
National Grid Holdings has agreed with Mr Eggar that the cost to the Recs of the deal will be broadly neutral. The sale price excludes the value of the grid's pumped storage business which is being sold separately for about pounds 300m. The proceeds of the sale of the pumped storage business and the cost of the special dividend will be approximately equal to the cost to the recs of the customer discount and their extra tax bill, said NGH.
Government sources said that the profit likely to be made by the Recs - around pounds 2.4bn - was being shared roughly equally by taxpayers and consumers on one hand and by shareholders on the other. The pounds 50 consumer rebate to the Recs - payable on the first bills next year - will cost the Recs pounds 45.95 net after excluding VAT at 8 per cent. Because of this and lower corporation tax the pounds 1.05bn benefit to consumers translates to a net cost to the Recs of about pounds 700m, company sources said.Reuse content