LONDON Dec 20 When Neil Withington, the legal
director of British American Tobacco (BAT) and the firm's
largest British shareholder, files his next tax return, he will
receive a little help from the state. Like every other UK
taxpayer, he will be entitled to a tax credit on any dividend
payment he receives. He can use it to reduce his total bill.
The credit is intended to compensate shareholders for the
fact that dividends are paid out of income which has already
been subject to UK corporate income tax. To help avoid the same
money being taxed twice, the UK trims its levy on dividends.
There's just one problem: BAT, Europe's biggest cigarette
maker by sales, didn't have a UK tax bill at all last year. In
fact, its accounts show, over the past six years its total UK
tax expense has been zero.
This means that the company's investors are being given
credit for taxes the firm has not actually paid.
BAT is not exceptional.
A Reuters examination of available public records has found
that for the most recent financial year, British shareholders of
at least 11 major blue chip firms have received more in dividend
tax credits from the UK tax authority than they lost through the
corporate income tax levied on their companies. This means that
in effect, the UK government is subsidising them to own shares.
Some tax experts say the system is no longer working as
"The logic has fallen away now and the policy has become
somewhat irrational," said Paul Morton, Head of Group Taxation
at publisher Reed Elsevier.
A spokesman for BAT said it, and members of staff who own
shares in the group, pay taxes in accordance with UK law which
is "set by the HM Treasury and Parliament." He added that this
reflected Withington's view. Withington declined to comment.
BAT's low tax bill also reflects the fact that less than 1
percent of its turnover is generated in Britain, company
accounts show. Other companies, too, are making more of their
money in global markets. As they do, and as headline UK company
tax rates fall, is the UK dividend tax credit out of date?
John Hemming, a member of parliament with the Liberal
Democrats, the junior member of the UK coalition government,
said in response to Reuters' findings that it was time for the
government to rethink the whole system.
"To give a tax credit where no tax has been paid doesn't
seem sensible ... The net effect on the public purse of these
arrangements needs to be reviewed," he said, adding that he
planned to write to the head of the Treasury Select Committee,
the parliamentary scrutineer of the UK finances, to ask for an
investigation of the credit system.
The government gives taxpayers dividend tax credits worth
around 4 billion pounds ($6.56 billion) each year, a Freedom of
Information request made by Reuters reveals. That sum has risen
around five times faster than the tax take from corporations
over the past decade. Overall, the UK still collects much more
in corporate income tax - an average of 33 billion pounds per
year over the past five years - than it gives away in tax
credits on dividends.
Brian Peart of the UK Shareholders' Association, which
represents individual investors, defended the credits, saying
they helped encourage individuals to hold shares.
"There are not enough private shareholders," he said. "If it
was abolished, this would make it worse."
MORE GENEROUS THAN INTENDED
The UK system dates back to 1973, and today it's unusual.
As corporate income tax rates fell around the globe through the
1980s and 1990s, countries including Ireland, France and Germany
found it too complex to match tax credits and corporate tax
bills and scrapped tax credits on dividends altogether.
The United States has never given dividend tax credits, said
University of Connecticut School of Law Professor Richard Pomp.
The dividend tax credit is not a cash sum, but an allowance
that individuals can use to reduce the income tax that would be
due on the dividend. It works out at one-ninth of the dividend
payment and is available to individual investors and those
holding shares through funds.
The credit is not intended to fully compensate an investor
for their share of a corporate tax bill, a finance ministry
spokeswoman said: The aim is "to reflect that some tax has
already been paid on the profits rather than to mitigate 'double
However, in cases like BAT, the system does more than this.
Indeed it means investors in many firms that pay big dividends
are, like Withington, saving more in dividend tax credits than
they lost through their share of the companies' corporate tax
The government does not compile data on a company-by-company
basis, so it is impossible to see how many firms across the
country are affected. Instead, Reuters examined accounts for 24
firms that have appeared on a list of the biggest UK dividend
payers published annually by shareholder services group Capita
Registrars. Of those, 16 disclosed data on their UK tax
Shareholders in 11 of them - from Anglo American Plc to
Vodafone Group Plc - received more in tax credits than they lost
in corporation tax, Reuters found. The calculations were vetted
by three tax experts. They said that a lack of clarity over when
tax bills are paid creates some margin of error, but the overall
trend is clear.
In practice, tax experts say that the tax credit starts to
become more generous than it was meant to be as soon as the
corporate income tax bill falls below 10 percent of its dividend
Drinks group Diageo, which makes Johnnie Walker whisky and
Smirnoff vodka, is another firm whose investors were net
beneficiaries of the tax credit system last year. In fact, over
the past 10 years, its total UK tax charge of around 330 million
pounds was just 3.7 percent of the 8.86 billion pounds it paid
out in dividends.
Diageo declined to comment on its UK tax bill.
Most of the company's profits are made outside Britain.
Diageo's experience is replicated at most of the 16 companies
that Reuters examined. Those companies which responded said they
followed UK tax law and personal income tax rules were a matter
for the government.
It wasn't meant to be this way, said Chris Wales, who was
chief tax adviser to the UK's finance minister in 1997 when the
dividend tax credit system was last overhauled.
"There was an expectation that shareholders would not
receive as credits more than the companies were paying in tax,
so finding out there is a different outcome is unexpected," said
Wales, now a partner with accountants PwC who was an adviser to
Chancellor Gordon Brown from 1997 to 2003.
"It seems the UK taxpayer is effectively subsidising the
shareholders of these companies," he added.
For the companies that Reuters studied, the switch is a
Ten years ago, the cost of investors' tax credits was around
half the corporate tax burden borne by investors in those
companies. Things began to change around 2007.
Tax advisers say the trend is explained by a drop of almost
one-third in the corporate tax rate over the past six years, as
well as the fact UK dividends are increasingly paid from income
earned outside Britain. Other - perfectly legal - tax avoidance
techniques may have helped.
The finance ministry spokeswoman said it would be too
complex to align the tax payments of individual companies with
the credits their shareholders received.
"It would ... be almost impossible in legislative,
computational, not to mention administrative, terms to link the
level of tax credit due on specific distributed profits to the
amount of tax that has been paid on it," she said.
However, Australia and New Zealand, two of a small number of
countries which still give investors dividend tax credits,
operate such a system. These countries give credits only in
respect of that portion of a dividend which has faced domestic
Dividends paid out of profits earned, and taxed, overseas do
not carry a credit.
Until the 1997 overhaul, Britain also operated a system
which ensured investors could not receive more in credits than
their share of the overall tax bill. This was scrapped in 1999.
Overall, the volume of tax credits awarded jumped 120
percent between 2001-02 and 2010-11, according to HMRC data.
That compares with a 20 percent rise in total corporation tax
Blue-chip investors may not have been the only
The rise in claims for tax credits may in part be linked to
tax management by self-employed individuals, said Kevin Thorne,
tax partner at Grant Thornton in London. Britain's tax authority
agrees that over the past decade, many individuals began to
arrange their affairs through companies, partly because paying
themselves in dividends could reduce their tax bills.
And shareholders in companies outside the UK also get the
tax credit. Britain is the only country which 10 tax experts
Reuters interviewed could name that gives its taxpayers credits
on dividends they receive from foreign firms.
That's the result of rulings in the European Court of
Justice in the mid 2000s. Under European Union law, the court
found, if you give a tax break on dividends from UK companies,
you must do the same for investments in foreign firms. The
finance ministry declined to provide figures for how much the
"It was never a principle of UK policy that the government
would do that but it became inevitable because of EU treaties,"