Budget boost to encourage new investment

4 July 1997

Budget boost to encourage new investment

By Philip Clarke

A DOUBLING of capital allowances for small and medium sized businesses in this weeks Budget has been welcomed by all sides of the industry, giving a boost to investment.

And while the definition of "small and medium" was not spelt out in chancellor Gordon Browns speech on Wednesday, tax specialist Graham Latham of accountants Grant Thornton believed the vast majority of farms would be covered.

The doubling means that a farmer spending £50,000 on a new tractor can now offset half of it (£25,000) against tax in the first year. If he pays tax at 40%, that will be worth £10,000 instead of £5000 under the previous arrangement.

"The key message is that, if anyone is planning an investment, it should be done for sound commercial reasons, not for tax avoidance," said Mr Latham.

But CLA tax specialist Adrian Baird said that, with the government also announcing plans to introduce new taxes next year for environmental protection, bigger capital allowances could provide a window of opportunity to invest and so avoid this eventuality. "If you have dirty water run-off near a water course, for example, it may well be worth using this chance to avoid pollution penalties next year."

Consultant Francis Mordaunt of Andersons added that, while increased allowances had been demanded by the industry for some time, they would be of only limited use. Farm incomes were now in decline and most investment had already taken place in the recent, more prosperous years. Furthermore, the concession only had a one year shelf life.

Another positive measure introduced by the chancellor was a 2% cut in corporation tax for small businesses to 21%. This applies to those with profits of less than £300,000 and includes most farming companies. "We would be even more pleased if he had extended this cut to unincoporated businesses," said the CLAs Mr Baird.

But there were, as ever, a number of negatives – not least the 4p/litre increase in diesel and pertrol costs. Together with index-linked rises in licences and higher insurance premiums, this will take vehicle costs up £1.50 to an estimated £17/acre on lowland farms, according to Richard Crane of accountants Deloitte and Touche.

Another negative is the limit on "carry back" for farming company profits. Previously a company making a loss this year would have been able to offset it against profits dating back three years, and claim a tax rebate. But now it can only be carried back one year. With some farmers facing losses in the next year or two, this could have serious consequences.

And for land agents the news was particularly bad, as Mr Brown doubled stamp duty to 2% on transactions of over £500,000. At £3000 an acre, this will hit all purchases of 167 acres plus, and is expected to take some of the steam out of land prices.

The chancellor made no reference to inheritance tax in his budget, but signalled a review of capital gains tax, which could see the end of retirement relief next year.

New Budget… new service. Chancellor Gordon Brown launches a new pocket guide to the Budget. Members of the public simply send their name and address to FREEPOST BUDGET 97 for a free copy.

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