Outlook: Time up for an antiquated tax

There was no guidance from the Treasury yesterday on the suggestion that Gordon Brown is about to scrap Advance Corporation Tax. It would be pretty odd if he were not, however. Crucially, scrapping ACT will level the playing field between UK companies and foreign companies with businesses based here. The Government's plan to prevent UK companies paying foreign income dividends from 1999 but allow foreign companies to continue is a ludicrous anomaly.

FIDs are the only way UK companies can avoid paying tax twice on dividends paid out of overseas earnings. No where else in the world do companies have to worry about where they get their profits from to pay their dividends. Without FIDs, UK companies like BAT, RioTinto and Glaxo Wellcome which make most of their money outside the UK would face a soaring ACT bill which they cannot offset against mainstream tax.

As things stand, UK companies face an uncomfortable choice from 1999 onwards; either curb their foreign expansion or pay the penalty. That rather flies in the face of Labour's desire to boost Britain's interests abroad. Abolishing ACT would allow British companies to invest overseas on rational financial criteria without the fear of keeping enough business in the UK to satisfy the tax system. It would also make the UK market more transparent and attractive to foreign companies.

The problem is that scrapping ACT has other attractions that Labour will be less inclined to encourage. Water companies with large capital investment programmes will do very nicely out of the abolition of ACT, thankyou very much. Lossmakers will also benefit. Losses mean no mainstream tax bill, so there is nothing to offset ACT against. Scrapping ACT will also undoubtedly result in more share buy backs. Companies like Reuters, which want to pay out capital, incur ACT if they initiate a normal buy back. Corporate financiers are feverishly attempting to find ways around the problem, but nothing has yet adequately replaced the ACT liable share buy back.

Regardless of these politically less palatable side effects, however, it would be madness for the Government to persist with this antiquated form of taxation. The sooner it is replaced with a phased system of corporation tax payments, the better.