The soaring popularity of tax-free deals cost the Government almost £300 million last year, The Times has calculated, a trend that is set to continue into 2008.

Treasury coffers are being depleted because bidders for UK-listed companies are turning increasingly to schemes of arrangement, an alternative way of structuring a takeover that exempts the buyer from paying 0.5 per cent stamp duty on top of the purchase price.

Last year Kohlberg Kravis Roberts, the American private equity giant, used such a scheme for the £9.7 billion buyout of Alliance Boots and saved £48 million in tax duty. It was one of 47 takeovers in 2007 worth a combined £58 billion to use such schemes, according to data from Thomson Financial. Others included the £9 billion acquisition of ICI by Akzo Nobel and the £9.1 billion takeover of Reuters by Thomson Corporation.

The Times estimates that the Government lost out on £290 million in stamp duty on those 47 deals.

In 2002 only eight UK-listed businesses worth £11.5 billion were bought using a scheme of arrangement, costing the Government about £57 million in lost stamp duty. The Treasury declined to comment on the impact of such schemes on tax take and said that any changes to the exemption would be “a matter for the Government”.

A scheme of arrangement differs from a standard takeover offer in several ways. Aside from the tax break, a scheme also requires a lower proportion of the target’s shareholders to agree to the deal for it to succeed. With a standard takeover offer, the buyer must convince 90 per cent of the target’s shareholders to accept the deal before it can force the remaining 10 per cent to sell. With a scheme of arrangement, the buyer needs to convince 75 per cent of shareholders, after which a court will approve the takeover at a specially convened hearing and the remaining 25 per cent of shareholders can no longer oppose it.

Andrew Watkins, a partner at the law firm Trowers & Hamlins, said that schemes had soared in popularity because their main disadvantage - having to wait for a court hearing – had become less of a problem.

Mr Watkins said: “Keen for the City of London to maintain its competitive advantage, the courts have become much better at fitting in scheme of arrangement hearings at short notice.” Tighter lending conditions are likely to make such schemes even more popular, especially with private equity houses, because either the scheme succeeds and the buyer secures 100 per cent of the target, or it fails and the buyer walks away with nothing. In a standard takeover offer, a bidder may acquire, for instance, only 85 per cent of a company, leaving 15 per cent in the hands of minority shareholders, which may impact on the buyer’s future plans for the company.

Mr Watkins said: “Bidders, especially private equity buyers, may embrace schemes even more enthusiastically because the security of securing 100 per cent of the target should make banks more willing to lend.” Banks are reluctant to lend on a standard takeover offer if it risks acquiring only an 85 per cent holding.

The biggest deals of 2007

Bidder - Target - Value - Est tax saving

KKR - Alliance Boots - £9.7bn - £48m
Thomson - Reuters - £9.1bn - £45m
Azko Nobel - ICI - £9bn - £45m
Pearl Group - Resolution - £3.9bn - £19m
Taylor Woodrow - George Wimpey - £3.15bn - £16m

Source: Thomson Financial & The Times

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