Britain Plugs Tax Loophole On Share Buybacks

British Chancellor of the Exchequer Kenneth Clarke said shareholders who previously would have been able to claim tax credits on share buyacks or special dividend payouts will no longer be able to do so as of October 8.

He said that the move stemmed from the growing loss of tax through schemes involving companies buying their own shares or paying special dividends.

The decision will hit British companies who so far this year have announced plans to spend up to 2.5 billion ($4 billion) in buying back their own shares, with this total seen rising to 4 billion by the end of the year.

Share buybacks are most beneficial to tax-exempt shareholders, principally pension funds, who can claim tax credits from the government.

We have seen recently companies buying their own shares or paying special dividends in such a way that the proceeds end up almost entirely in the hands of those who are entitled to payment of a tax credit, Clarke said. This has costs for the Exchequer, and if action is not taken soon that cost would escalate, he said.

He said a provision would be included in the next Finance Bill to change the tax treatment of such schemes and added that this would result in cost savings of as much as 400 million a year from 1998-99. The government takes a firm attitude on tax avoidance. The scale of the exploitation means it had reached a point where the Chancellor had to act because of the costs involved, said a source.

Shares in a string of top British companies planning buybacks fell amid concerns that the ruling makes these schemes less attractive to their major investors.