View from City Road: Getting in on the ACT

We have never liked enhanced scrip dividends, which are usually nothing more than a thinly disguised rights issue. They can only be justified for companies that have problems with unrelieved advance corporation tax. Most are simply tapping their shareholders for money by the back door.

We now have a chance in the autumn reporting season, which got under way in earnest yesterday, of sorting companies with genuine advance corporation tax problems from the sheer opportunists.

The test is simple. Foreign income dividends are an the alternative tax- saving scheme devised by the Government which came into effect in July. They have much the same tax effect as an enhanced scrip.

But because the dividends are paid in cash rather than shares they do not have the pernicious effect of the enhanced scrip dividend in diluting other shareholders' interests.

Companies such as Coats Viyella and Burmah Castrol did issue enhanced scrips and yesterday followed BAT's lead and said they intended to pay a foreign income dividend. That's good evidence they had the right motives when they embarked on enhanced scrips in the first place.

The opportunist camp will be just as easily identifiable. Those companies will not be seizing the opportunity to pay foreign income dividends. Their names will only become apparent in the next few weeks. But companies such as Redland, Forte and Ladbroke are strong candidates.

This is not a vendetta against fancy ways of paying dividends. Companies which genuinely have a long-term, structural ACT problem need them.

Burmah Castrol calculates that its dividend decision will cut up to two percentage points from its tax charge, while Coats Viyella thinks it should keep its rate between 30 and 35 per cent compared with the 38 per cent- plus it would otherwise have suffered.

These companies can also afford to gross up the payment to compensate tax-exempt shareholders, like pension funds, for the fact that there is no tax credit on a foreign income dividend. The money would, after all, be going to the Inland Revenue otherwise.

Those whose ACT problems arose more from owning recession-torn British businesses than from having strong overseas subsidiaries may, however, find the savings less clear cut. That means foreign income dividends are unlikely to achieve quite the popularity of enhanced scrips.