Reuters eloquence speaks volumes to taxman

COMMENT: 'Over the past three years the Revenue must have lost out to the tune of well over pounds 1bn as a result of the various wheezes the City has dreamt up to enable big tax-exempt shareholders to claim a tax credit on any corporate distribution over and adinary dividends'
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On the face of it, Reuters has chosen an unnecessarily complicated way of returning money to shareholders with its special dividend share. The more you think about it, however, the cleverer it looks. SBC Warburg, the investment bank that helped draw up the proposal, has an even better word for it. "Eloquent" is how they like to describe it round there. Whether the Inland Revenue finds it quite so clever is another thing.

Over the past three years the Revenue must have lost out to the tune of well over pounds 1bn as a result of the various wheezes the City has dreamt up to enable big tax-exempt shareholders like pension funds to claim a tax credit on any corporate distribution over and above ordinary dividends. First we had the off-market tender offer (Reuters again, that one), then the enhanced scrip dividend, then the share buy-back, or "on-market agency cross" to use the technical jargon. Now there is an even newer technology to add to the armoury, the special dividend share. All these schemes vary a little in their underlying commercial purpose, but the effect is always the same; they enable the big pension funds to claim a 20 per cent tax credit on all the extra money paid out.

You can argue about the morality, the pros and cons, and the mechanics of this until the cows come home, but the basic point remains the same - well over pounds 1bn that would otherwise be lying in the public purse to be spent on such obviously deserving national causes as the Eurofighter and Britain's burgeoning social security budget, has ended up with City pension fund managers. While many of us might think the pensions industry a rather better home for the money than the politicians, the Revenue must none the less be getting mighty pissed off. Sure, the law allows companies to do this. But you can bet your boots they wouldn't be paying out their cash on quite this scale were it not for the fact that the only loser in the process seems to be the poor old Inland Revenue. The law was surely never designed with this eventuality in mind.

The Reuters scheme has added a new dimension to the debate. Reuters claims it would have done a share buy-back but for the fact that American securities law is incompatible with a buy-back that would allow institutions the tax benefits. So it has chosen this route, which has the added attraction of allowing the 37.5p-a-share special distribution to be spread over three years. The other point of the special dividend share is that the extra income becomes divorced from the company, like an annuity or a split capital trust. All very eloquent.

But the real eloquence seems to lie in an area which Reuters is none too keen to trumpet - the way it allows all shareholders, taxable and tax-exempt alike, to benefit from the tax credit. What Reuters is doing is securitising the extra dividends in a special dividend share. When traded, this share can thus be expected to reflect the value of the dividends to a non-tax-paying fund; they ought to trade somewhere between the gross and the net value of the dividends. As a result ordinary tax-paying shareholders will share in the benefits of non-taxpayers. Mmmm, the men in bowler hats round at Somerset House must be thinking.

Bonuses regardless at Morgan

Many in the City will have a deep and weary understanding of why Deutsche Morgan Grenfell will need to pay millions of pounds in bonuses to its fund management staff early next year.

Like Barings, where ING had to pay bonuses regardless of Nick Leeson's losses, the value of a company such as Morgan Grenfell Asset Management rests not just on brand name and client lists, but on the expertise and contacts of the employees too. The best people will be sitting ducks for poachers if they receive no bonuses when they are due to be paid next February or March.

The purist would none the less argue that no bonuses should be paid, indeed that to pay them merely encourages the lack of collegiate responsibility and sloppiness that allowed Peter Young to flourish. Morgan's bonus system is not linked to the short-term performance of individual funds, but is based on a rolling assessment of profits over several years plus a discretionary element for individual performance. So far, the cost to Deutsche of Peter Young's investment mystery tour is pounds 180m, the amount injected into the funds. That figure represents seven years' profits for the fund management arm, and it is also equivalent to a year's profit for the whole Morgan Grenfell group.

The cost is almost certain to rise, when compensation to investors and regulatory fines are thrown into the pot. On any reasonable view, Morgan Grenfell Asset Management executives should be left without sweeteners until past the millennium. Obviously, that is not going to happen, for if Deutsche were to do this it would soon have no business at all.

All the same Deutsche must be wondering about a system which, though it boasts a collegiate structure of control, has everyone running for the door the moment they are required to talk real monetary responsibility for their colleagues' misdemeanours.

Twitchy days at the National Grid

Not many complaining days left until Professor Stephen Littlechild decides just how hard to clobber the electricity transmission industry and the boys around at the National Grid are starting to get twitchy.

In their formal response to the Prof's proposed new price controls they have at last managed to generate sufficient rage to utter the phrase "expropriation". That's more like it. This is the kind of language guaranteed to get institutional shareholders hot under the collar and it has worked.

Funds owning nearly a third of the shares have written to the watchdog warning him to back off otherwise they will tell the Grid to go to the Monopolies and Mergers Commission. Mobilising shareholder support is now a familiar tactic among regulated monopolies at the wrong end of price reviews. British Gas got Sids to write in by the sackful bleating about Clare Spottiswoode's treatment of TransCo.

Sadly, it had precious little effect on her final proposals. Notwithstanding the higher calibre of the Grid's correspondents, it should not count on doing any better. Even as they stand, the price controls would shave only pounds 4 off the average bill and require annual efficiency gains of no more than 4 per cent. So he is unlikely to be in the mood to make big concessions.

In any event the Grid and the Prof appear to be nudging closer together on valuation and estimates of efficiency gains. True, this is partly down to the depressing effect his initial proposals have had on the Grid's shares. The "market-based" value of its regulated assets, even if both sides agree the telecoms business Energis is worth nothing, is pounds 4bn. The Grid may have less to lose than BT or British Gas from going to the MMC. But it should not count on the threat extracting more than a token concession.

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