Pru man rues tax switch

Jonathan Bloomer, the Prudential's finance director, is one of thousands of PEP holders who will suffer from the insurance company's decision to pay shareholders their entire pounds 124m half-year pay-out as a foreign income dividend (FID).

Last week the Prudential followed the route pioneered by Allied Domecq, which was the first company to opt to pay a FID as a result of tax changes in the Budget.

Smaller shareholders, notably those owning shares in PEP plans, suffer severely when companies opt to pay a FID rather than a conventional ordinary dividend. For FIDs do not carry the 20 per cent tax credit available on conventional dividends, which PEP holders and other non-taxpayers can reclaim and which give PEPs their advantage.

In contrast, companies opting for FIDs reduce their own overall tax bill through reclaiming advanced corporation tax (ACT). And as a result of the last Budget, it now makes no difference to the big pension funds, the owners of major chunks of the Prudential, Allied and other listed UK companies, whether a dividend is a conventional one paid out of UK profits or a FID.

"We had a debate at board level and we decided that the benefit to the company and shareholders as a class far outweighed the cost to small shareholders," said Mr Bloomer, adding that the move costs him personally since he holds Pru shares in his PEP.

There is considerable irony in the decision since the Pru itself is one of the largest PEP pro-viders. But the move, Mr Bloom- er said, is likely to save the company "tens of millions in tax".

Allied said last month that it will benefit by pounds 25m through paying a FID and thus being able to reclaim what is called "surplus" ACT paid in the past.

The Pru's decision underlines the current row over Gordon Brown's Budget announce- ment that he would scrap FIDs in 1999. At the same time, the Chancellor scrapped the ability of pension funds to reclaim the tax credit. Before that, pension funds did far better from receiving conventional dividends and companies were happy to oblige them. This was so even when it sometimes would have benefited companies to pay a FID and reduce their corporate tax bill.

Now that they are no longer disadvantaging their powerful shareholders, companies are rushing to pay FIDs and urging the Government not to scrap them.

"The problem lies in a tax regime that is not coherent at the moment," said Mr Bloomer. "They have made changes to one side of the equation without tackling the other."