Storm brews over Grid tax treatment

MARY FAGAN

and JEREMY WARNER

A row is brewing over the tax treatment of shares in the pounds 3bn National Grid flotation, with small private shareholders expected to lose out heavily and the big tax-exempt pension funds reaping rich rewards.

The Inland Revenue has determined that the distribution of National Grid shares, details of which are to be announced today, will be treated for tax purposes as a dividend payment. That means that private investors will have to pay tax on the shares regardless of whether they sell them. By contrast, big City institutions will be able to claim a tax credit from the Exchequer.

The National Grid is owned by the 12 regional electricity companies in England and Wales. The flotation is to be accomplished by passing these shares pro rata to shareholders in the Recs.

The tax issue is sure to enrage many private shareholders, who as normal taxpayers will not be able to benefit in the same way as the big City pension funds.

The flotation of the grid will take the form of allocation of the shares held by the 12 companies to their existing shareholders. The plan was plunged into controversy yet again last weekend after it emerged that electricity executives who have shares and share options in the 12 regional firms stand to make millions of pounds when the grid is floated.

One Whitehall source said the tax issue had nothing to do with the grid sale per se. "It may be regarded as unfair but that is opening up a different argument over whether the tax benefit is just. It is a general point and has nothing to do with the National Grid," he said.

The flotation of the grid has been dogged by controversy, with government and industry wrangling for months over the details. Last month it was announced that customers would receive a pounds 50 rebate after the flotation in spite of strong opposition from the regional firms.

The pounds 50 rebate, although regarded by ministers as a triumph, was marred by an embarrassing row over "fat cats" in the privatised utilities after grid directors resisted ministerial pressure to waive their share of the special dividends.

David Jefferies, chairman of the National Grid Company, stands to make pounds 190,000 from the dividend payable on his shares while three other directors will get payments of pounds 125,000 between them.

Their decision to take the profit is known to have incensed Tim Eggar, Minister for Energy and Industry, and also angered executives in some of the 12 regional firms.

A spokesman for National Grid said that 500 individuals below board level in the company also owned shares and "are legally entitled to the dividend".

Mr Jefferies said recently that he felt "no guilt whatsoever" about his expected gains, adding: "I feel simply that what I choose to do with the money will be my decision."

He said he felt "very strongly" that the freedom of the individual shareholder was at stake.