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MARKET COMMENT
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It's an ill wind that blows no one any good and hidden away in the small print of yesterday's pre-budget report was the news of a clamp down on extended warranties. These little blighters charge you a fortune to give you rights that you mostly already have and maybe don't actually need. Big electrical retailers, especially Dixons (LSE: DXNS), have been making a fortune out of them for a while, but it came as a surprise, to me at least, to hear that a tax loophole had enabled them to escape tax on them! That is all set to change -- today -- and it's about time too. The detail is a little technical, but it has the look of a good old-fashioned tax wheeze. The basic rule is that the profits of "controlled foreign companies" (ie foreign subsidiaries of a UK parent) get caught in the UK tax net. There is, however, an exemption where 90% of the CFC's profits are paid out as a dividend to a UK person. The trouble is that if that person is a bank, which has bought the right to receive the dividend from the 'CFC' for an inflated amount, then the bank can set the dividend off against its loss on buying it. So the money comes home to the UK (by way of the inflated purchase price for the dividend) and no one pays any tax. Or something like that. Anyway, the point is that Dixons had the profits from their extended warranties being made by these CFCs and the company said today that closing the loophole would cost it £20m in the 2003/4 year. If we assume that the profits will now be taxed at 30%, then we can guess that Dixons is making around £67m a year from extended warranties. That's almost a quarter of last year's profit! We can dream that these frightful things will disappear completely, but you'd be needing an extended warranty on the shares if that dream came true. For the time being, we're looking at about 8% being knocked off the company's earnings going forward indefinitely. So it's nice to see the market efficiently slicing 8% off the share price. > The Fool's Pre-Budget Review