View from City Road: ACT burden hurting industry

IF John Major genuinely wants to help British industry, as he suggested in a new year interview, he could do worse than turn his attention to advance corporation tax. Far from being a fiscal backwater, ACT is a central industrial and investment issue.

Recession, coupled with the growing importance of overseas earnings, has made this tax intolerably expensive for many companies. It is affecting their valuations and their ability to raise money.

ACT is paid by companies when they give dividends to shareholders. It is levied at 25 per cent to discharge shareholders' basic tax liability. Companies can offset it against their corporation tax bill. There is a cyclical problem to the extent that during the recession UK profits have fallen and so reduced companies' liability to corporation tax. It is also structural to the extent that companies with large overseas earnings have insufficient corporation tax liability against which to offset ACT.

As a result it is not just recession-hit companies such as Pilkington and Lucas Industries that suffer huge tax charges - 55 and 124 per cent last year - but also those with overseas business such as BAT Industries - 54 per cent - and potentially even Unilever.

Some companies admit privately that they are looking at ways of moving costs overseas, in order to boost their UK profits. Pilkington's decision to locate the head office for its European float glass operations in Brussels is often viewed in this light, much to the company's embarrassment.

There is also a risk of damage being done to the corporate research base of the UK.

Various proposals have been put to the Treasury and to the Department of Trade and Industry ahead of next weekend's Chevening meeting. But the cost and tax- gathering implications are likely to be too much for the Government to accept this year, at least. With this in mind one industrialist, who prefers to be nameless, has even suggested that corporation tax should be raised to give relief to ACT victims. Whether UK earners would support this looks doubtful.

In the meantime, companies with high tax bills and low earnings will find it hard to raise money to finance the upturn by issuing lowly rated shares. Perhaps that is why Lucas and others are talking about disposals rather than share issues.