How to make the fat cats thinner

City & Business

The pounds 84m profit made by former British Rail staff who bought out Porterbrook leasing from the Government in January and sold the train- leasing business to Stagecoach last week has generated a range of emotions. Envy and anger have featured heavily, but the most common has been complete bewilderment at how a business worth pounds 527m when it was sold on behalf of the taxpayer can be worth pounds 825m only seven months later.

There is a real sense that somehow we have been cheated.

There is little point crying over spilt cream and moaning about how once again the fat cats have prospered at the hands of political expediency.

However, the Porterbrook affair does raise important questions about a privatisation process that manifestly failed to properly value the underlying business and also again draws attention to the issue of the significant gains made by corporate executives courtesy of sharp rises in share prices.

You will remember that the biggest source of disquiet during the debate about executive pay was the big gains made on share options by directors of newly privatised utilities. The ease with which they secured something for nothing was objectionable.

There is, however, a solution to this problem that would safeguard the taxpayer from the undervaluation of privatised assets, encourage longer- term ownership and abolish capital gains tax. Put simply, the current capital gains tax regime needs to be amended to introduce a tapering rate of taxation that would reduce to zero over a 10-year period. The shorter the time an asset was held, the higher the rate of CGT it would attract on disposal.

If the capital gains tax on assets held for less than a year was levied at 90 per cent, for instance, what difference would that have made to executives at Porterbrook who were so happy to take the Stagecoach shillings? Sandy Anderson, Porterbrook's managing director, is sitting on a profit on his shareholding of around pounds 28m. If he took that all in cash it would yield him a net profit of nearly pounds 17m after capital gains tax.

Not bad for seven months' work and a clear incentive to sell. If, however, CGT was levied at 90 per cent, his profit would fall to less than pounds 3m. Still not a bad return but maybe not quite the no-brainer decision of last week. If he and his colleagues still accepted the bid under a 90 per cent regime, the taxpayer would recoup much of the undervaluation through the capital gains tax levy.

Under a tapering system, the rate of CGT would decrease the longer the assets were held. If after 10 years Mr Anderson and his colleagues chose to sell the business they would be entitled to keep their entire gain. But over a 10-year period they would have been expected to add some real value. The criticism they face at the moment that they have done little to enhance the worth of Porterbrook would have been long rendered redundant.

In Porterbrook's case the undervaluation was driven in part by politics but largely by a failure to fully understand its worth by the Government. Introducing a higher tax rate of CGT for early disposals would not be a malicious assault on the fat cats, merely a safety net to protect the taxpayer.

The beauty of the 10-year taper is that more generally it would also encourage executives who do benefit from share options to hold on to their shares for much longer once those options had been exercised. Those who preferred to get fat quick would be put on an immediate diet by the imposition of a high rate of CGT.

That would deter a short-term rush for quick profits and encourage company directors to stand more squarely alongside the interests of their long- term investors.

Finally, the new tapered tax would, in effect, abolish capital gains tax for long-term holders. Abolishing taxes is something that appeals to all politicians. CGT is a particularly cumbersome and inefficient tax, whose main purpose is to deter tax avoidance in that it removes the incentive to have income classified as capital. If capital gains tax were still payable within a 10-year period it would require some quite determined tax planning to exploit any avoidance opportunities.

Clearly if one aim of a tapered CGT was to claw back excessive profits some of the reliefs, particularly when the consideration is in the form of shares, would have to be reviewed. Indeed, the Government could introduce the revamped tax tomorrow if it had the will.

There is nothing to stop it changing the top rate of CGT immediately. That would reduce considerably Mr Anderson's profits since his capital gain only crystallises once the deal goes unconditional. That would still leave him much better off than before the Stagecoach bid but an altogether thinner fat cat.

Rejuvenating Rank

Anyone expecting a long list of specific disposals from Rank chief executive Andrew Teare when he unveils his strategic review this week will be disappointed. In fact they should be relieved. The worst thing he could do would be to make public his sale wish list. History shows that uncertainty of ownership is extremely demoralising for the workforce and that can have a detrimental effect on the realisable value of the business.

It is already known that the Shearings coach holiday business is up for sale, as is Precision Industries. Beyond that Mr Teare is wise to keep his counsel. It is known that he has been through the group with a fine tooth-comb, and he has already demonstrated that he is comfortable with the concept of challenging the status quo. So if he is backward in coming forward, it will not be because he is short of ideas.

It should also be remembered that Rank is not a basket case company. It is a group with good businesses and powerful brand names, some of which have failed to realise their full potential. The more important task for Mr Teare is not to orchestrate a mighty corporate upheaval but to oversee a rejuvenation of the management style and culture, and to bring a clear sense of direction and purpose to the group.

That may not provide the high-profile quick fix that some are pressing Mr Teare to deliver, but if he can inject a new sense of dynamism and focus to the group he will be serving the long-term interests of shareholders more effectively.