The Minister for Finance is considering requests from a number of companies that dividend payments declared and scrip dividend offers accepted before December 3rd should not be affected by the tax changes brought in with the 1998 Budget.

If the dates for tax changes are not adjusted, companies may come under pressure from shareholders to pay higher dividends to compensate them for the increase in their income tax bills.

A number of companies, including Bank of Ireland and DCC, have lobbied the Department, arguing that they had already declared their dividend payments and informed their shareholders before the December 3rd Budget, but have not yet made the payments. Some companies had just invited shareholders to opt for new shares (scrip shares) instead of cash dividends and shareholders had accepted the offer but have not yet received the shares. The tax changes come into effect for dividends paid or scrip dividends received on or after December 3rd. A significant number of shareholders regularly opt to take their dividends in the form of new shares as part of their tax planning. Dividends incur an income tax liability while scrip dividends incur an eventual capital gains tax liability.

In his Budget statement Mr McCreevy announced that the tax credit on dividend payments to shareholders is to be wiped out in two stages. And scrip dividends received on or after December 3rd became taxable as income. Tax credits will be reduced by about half on dividend payments made on or after December 3rd this year. The remaining credit will disappear from April 6th, 1999. The credits reduce the tax shareholders have to pay on the dividends they receive. Their removal will mean a higher tax bill for shareholders. Bank of Ireland said the change will mean an 11 per cent reduction in the after tax value of the dividend to the shareholders this year, followed by an 18 per cent reduction next year. And shareholders who recently opted for shares in lieu of dividends will face an income tax bill unless the Minister adjusts the dates of the tax changes.

DCC, for example declared its interim dividend and scrip offer on November 11th. The tax credit on the 3.52p net dividend per share was 0.749807p (the credit has to be calculated to six decimal places under Stock Exchange rules). But tax credits on any payments made on or after December 3rd 1997 have been cut. For DCC, which is due to pay shareholders on January 8th, the tax credit has been cut to 0.373957p per share.

This means that the tax bill of a DCC shareholder at the top income tax rate will increase from about 1.299p per share to about 1.417p (before any levies) this year. Shareholders who opted for scrip dividends will be liable for income tax on the value of the dividends less the lower tax credit.

But because the tax credits for shareholders come from tax prepaid by the company, or advance corporation tax which is being phased out in a matching move, shareholders are expected to start to look for increases in dividend payments to compensate then for the higher tax bills they will face.