Reuters advised to move against ACT

Reuters may have to start lobbying for the abolition of advance corporation tax or even move its tax domicile, according to City analysts, who say that the company’s proposed ‘special dividend share’ (SDS) doesn’t solve its fundamental ‘cash dilemma’.

Brokers HSBC James Capel said in a circular to clients that the company is restrained by its ACT position from paying hundreds of millions of pounds of surplus cash to investors. The SDS was devised to allow Reuters to pay # 613m to shareholders over a three-year period, tax efficiently.

Even so, the company is expected to have a # 1.4bn cash pile by the end of 1998 – more than can be returned to shareholders without paying out unrecoverable ACT. ‘Assuming it does not have alternative plans for its cash (ie, acquisitions), Reuters will have to consider more radical action,’ the brokers claimed.

Analyst Lucy Whittome said the suggestion that Reuters might change domicile was ‘provocative’, but added that the company had talked about how the US tax system was better in some respects. But she claimed that this would create almost as many problems as it would solve.

Price Waterhouse and Robson Rhodes were involved in advising Reuters on its SDS, as were barristers John Gardiner, QC, and Richard Bramwell, QC. SBC Warburg also advised.

If the Revenue takes a relaxed view of the SDS, which will be tradable on the stock market, the cost to the Treasury could be as much as # 123m if all SDSs wind up in the hands of non-taxpaying investors.

But while such investors who held Reuters shares at the time of the announcement are certain to be able to reclaim the tax credit, the Revenue is almost certain to invoke anti-avoidance measures to bar rebates to those who buy Reuters shares or the SDS subsequently.