Employees' perk exposes tax red herring
Saturday 27 May 1995
No, this is not the notorious fat cats' executive option scheme, now part of our national demonology as a result of the profits made by David Jefferies, chairman of National Grid, who transferred some of his shares to his wife to save additional tax.
It is in fact the Inland Revenue's Save As You Earn share option scheme, used by 590,000 employees a year, which happens to be pretty well identical in tax relief terms to the executive share option schemes beloved by our overpaid utility directors.
The scheme gives the same tax saving as executive options. By allowing profits to be counted as capital gain rather than income, they qualify for the full CGT allowance of pounds 6,000 a year. If you make pounds 730,000, like Mr Jefferies, the odd few thousand of tax saved is neither here nor there. Under the SAYE scheme, however, they make all the difference. Somebody who makes a pounds 25,000 profit, as some secretaries, clerks and chauffeurs at Standard Chartered Bank did recently, can avoid paying CGT on the whole lot, by giving half the shares to a spouse, and spreading the sale over two tax years.
Even with the executive schemes, it is not just the fat cats who benefit. The Inland Revenue says there is no reason why firms should not spread the benefits of the executive share option scheme to all employees, and some actually do.
According to a recent survey by KPMG, just over half of companies extend the executive scheme down to middle management, and 14 per cent allow non-management staff in. As many as 80,000 people a year take new options under executive schemes, at a cost to the Treasury of pounds 50m.
The oddity of this whole row is that the few beneficiaries of these tax perks who would not notice their abolition are those at the top, whose enormous windfall gains would dwarf the lost tax benefits.
Mr Brown has in the past acknowledged the fairness of the SAYE option scheme. He should now recognise that the tax issue is a red herring and that what matters is stopping the award of over-generous share options in the first place.
Northern should do the honourable thing
Much energy, anger and expenditure is being incurred on the bid that Northern Electric will not allow Trafalgar House to make. There are principles aplenty involved, but given the length of time it is taking to settle the matter, little else. Northern shareholders meet next Friday to vote on the matter. Dissident shareholders, led by the American arbitrageur Guy Wyser-Pratte, are trying to force Northern directors to agree that Trafalgar House should be allowed to make the new bid, worth pounds 9.50 a share. It is the shareholders' right, not the board's, to decide whether Trafalgar's bid is worth accepting, is the rallying call. The board is resisting on the grounds that present regulatory uncertainty makes it impossible to offer credible counter-proposals as a defence.
Many might reasonably wonder what the whole thing is about as Professor Stephen Littlechild is in any case due to end the regulatory uncertainty by the end of next month by publishing new price controls. Furthermore, it has become quite unlikely that Trafalgar would now actually make the promised bid until it knows the outcome of that review. So even if the dissident shareholders win, it may prove something of a Pyrrhic victory.
The principles involved are nonetheless important; the evidence for this is in the allegations of dirty tricks now flying as both sides limber up for the proxy battle. On almost every point the Northern board falls. It will be interesting to see just how far it is prepared to push the point. Legally, the dissidents need a 75 per cent majority to get their resolution adopted. In practice it would be hard for the board to stand firm with any less than majority support.
The Prudential is wrong in sticking to its usual stance of backing the incumbent management. The Northern board is allowed to refuse Trafalgar permission to put its new bid because takeover rules stipulate that once an offer lapses, the bidder is not allowed back for at least a year. The reason for this rule is that the Takeover Panel judges it to be unfair for a bidder to be allowed to lay permanent siege to a company. This case is different, however. Trafalgar lapsed its first bid because of force majeur, the regulatory review. As a consequence, Northern also lapsed its 24-carat defence, though saying it would try its best to deliver on what it had promised. In these circumstances it seems perfectly reasonable the contest should be allowed to resume at whatever price Trafalgar believes appropriate. Just as Northern doesn't know what it is dealing with until the outcome of the pricing review is known, nor does Trafalgar.
Northern might like to believe that its shareholders want to hang around long enough to see what may or may not be good news for them, but it is hardly the reality of the position. A very substantial number would be very happy to see Trafalgar shoulder the risk. Northern directors have enjoyed all the other benefits that come with private sector ownership. Now they must face up to its other consequence, the discipline of the market.
Hong Kong Scots sweep the field
Thank you and goodbye, Richard Delbridge, the respected finance director of HSBC, who yesterday presided over his last annual meeting at the group before retiring early. Career prospects for former Midland executives, like Mr Delbridge, have been a bit iffy since the bank was taken over. Now the rugby-mad Hong Kong Scots have the whole playing field to themselves. There isn't a Midland Bank man still on the board.
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