Outlook: Lord Sterling votes with his fleet

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JOHN PRESCOTT and Lord Sterling of Plaistow make unlikely shipmates, but now that New Labour has thrown most of its old ideology overboard it seems that pretty much anything is possible. Thus, the main beneficiary of the Deputy Prime Minister's new tonnage tax will be a true-blue businessman who once served as special adviser to successive Tory trade secretaries.

The change in the regime for taxing UK shipping companies is long overdue. In the past two decades, the UK merchant fleet has shrunk from 1,300 vessels to 250 largely, though not exclusively, because of a tax regime which discourages shippers from locating here. Treat a mobile industry like shipping badly and it tends to vote with its fleet.

P&O, Lord Sterling's company, accounts for nearly half what remains of the British shipping industry and so has most to gain from the Prescott changes, recommended incidentally in a report written by Lord Alexander.

Its tax charge will drop from 22 per cent to 15 per cent, boosting after-tax profits and earnings per share by some 9 per cent. The market was still factoring this in yesterday but if P&O retains no more than its existing rating then the shares should have further to travel yet.

The cost of the tax change to the Exchequer is some pounds 40m. But that should be more than offset by the reinvigorating effect on the British merchant fleet. P&O alone is bringing 50 ships back on to the UK register. Henceforth, it will be inclined to look less far afield when having its vessels refitted which is good news for the shipyards too.

Lest it be thought Mr Prescott is engaging in unfair tax competition, he is keen to point out that not only has Brussels expressly approved the concept of a tonnage tax but similar arrangements have already been introduced in Norway, the Netherlands, Germany and Greece.

Best of all for Mr Prescott, himself a former merchant navy steward of course, P&O is doubling its intake of British cadets. This is part of the deal if it wants to qualify for the tax. From now, the Deputy Prime Minister can boast that our merchant navy is sailing under the the Red Ensign in more ways than one. Pip, pip!