Dividends to get treasury scrutiny: Chancellor stirs fears of tax changes to rein in companies making high payouts to shareholders

KENNETH Clarke, the Chancellor, yesterday stoked up City fears of tax changes to discourage high dividend payments when he said the Government was 'very actively looking' at what it should do about the issue in the Budget.

Introducing a White Paper that identified the UK's comparatively high levels of dividends as an area of concern, Mr Clarke said the Treasury was widening the scope of a review of savings now being carried out by Stephen Dorrell, the financial secretary.

Mr Clarke said: 'One of the things we will have a look at is that a greater proportion of dividends are distributed here than in the rest of the EC. We will have a look at that. All these matters are being considered in the run up to the next Budget.'

Moving well beyond statements made recently by Mr Dorrell, he added: 'The Government is going to form a view as to what we should do.'

City institutions have been lobbying Mr Dorrell in defence of high dividend payouts, which they say are recycled to industry through rights issues - a process claimed to be an effective discipline on managers.

But the Commons Trade and Industry Committee and the Institute for Fiscal Studies have pinpointed the tax exemption of pension funds as an incentive to high payouts by companies. This is claimed to reduce industrial investment because retained earnings are cheaper than raising outside finance.

Changes to advance corporation tax last year have already hit pension funds and the Government may be preparing to have another go at balancing the position between dividends and the returns on other forms of investment. Some City investment managers suspect this is intended to make investment in government stock more attractive.

The White Paper received a mixed reception. Howard Davies, director general of the Confederation of British Industry, said: 'The analysis of Britain's competitive position is commendably frank.' But he added: 'The real value of the White Paper will depend on how its influences government policy in the future.'

John Monks, general secretary of the Trades Union Congress, said while he liked the stress the Government was placing on manufacturing industry, he found gaps in what it had to say on training. 'The Government has failed to seize the opportunity to implement a training levy to ensure that all firms contribute fairly to the training effort,' he said.

John Neill, group chief executive of Unipart, emphasised 'the need to take the long-term view of investment decisions.' Bill Morris, general secretary of the Transport and General Workers' Union, said training was key to competitiveness. He called for every worker to have five days training a year 'in order to ensure that skills are regularly modernised'.

Although the White Paper discussed the needs of small businesses at length, Stan Mendham, chief executive of the Forum for Private Business, was unimpressed. He said the paper had missed the most important question, that of late payments.

George Simpson, chief executive at Lucas Industries, said the paper provided a springboard for the larger and more successful British companies to be more cooperative with their suppliers.