Companies may go abroad to avoid double taxation hit

Some of the UK's biggest overseas earners were up in arms yesterday over the Chancellor of the Exchequer's plans to abolish foreign income dividends. SmithKline Beecham, BAT Industries, Glaxo Wellcome, RTZ and Reckitt and Colman were among those objecting to the Budget proposals which expose companies making substantial non-UK profits to a double taxation hit after April 1999.

Privately some even raised the possibility of moving their domicile outside the UK. Analysts estimated the move, which could cost UK companies more than pounds 400m a year, would lead to a sharp increase in the number of companies choosing to pay their dividends as "Fids" before the 1999 deadline.

Hugh Collum, finance director of the SmithKline Beecham drug giant, which makes in excess of 90 per cent of its earnings from outside the UK and pays half its total dividend as a Fid, said yesterday the move could force some companies to leave the UK. "It is a possibility. It is an alternative if this proposal goes through. It is one of those issues that SmithKline Beecham has considered," he said.

Mr Collum said he would lobby Labour to modify its plans. "We would have expected the Government to put a cap on Fids, so that companies which make, say, over 40 per cent overseas can still pay dividends in this way. I hope we will find some way to compromise on this issue."

Michael Prideaux, a spokesman for BAT, said: "This is completely inequitable. I can't believe that a supposedly pro-business government wants to penalise UK companies. We will be arguing our corner. There are a lot of companies affected." RTZ, the world's biggest mining group and based in London, was known to be deeply unhappy and Glaxo Wellcome said it was "disappointed" and would "make our views known". David Saltmarsh, company secretary at Reckitt and Colman, said: "We have until 1999. This is a double taxation on our overseas profits."

The upset about the abolition of Fids, which were introduced by Norman Lamont when he was Chancellor in the early 1990s, reflects their "use" as a way for companies to avoid paying unrecoverable tax. Fids, which can only be paid by companies with significant non-UK earnings, allow companies to offset the Advance Corporation Tax (ACT) they pay on dividends against their mainstream UK tax bill. For companies which make relatively low profits in the UK and so have a small mainstream tax bill, accumulated ACT hits earnings.

Fids do not incur ACT and so allow companies to top up their UK dividends without damaging their earnings growth. Abolishing Fids will force companies which want to maintain their level of dividend growth to pay more ACT or could lead to cut in dividends. The companies hardest hit will be those such as Lasmo, BTR and RTZ which use Fids extensively.

Paul Wopshott, tax expert at Price Waterhouse, said: "Gordon Brown's move brings the whole ACT problem back to square one. It will be criminal if any company that can do it does not now start paying fids." Phil Collins, UK equity analyst at James Capel, said: "These companies will either now disappear from the UK altogether or will start paying fids so that investors will accept a lower level of UK dividends later".

Though most observers argued that leaving the UK was the "nuclear option" and may incur prohibitive costs, it is likely to be used as an argument to persuade chancellor Mr Brown to change his decision. According to Mr Saltmarsh: "If there is no other solution, if the government remains unreasonable, it may be the last resort."