Investment blow to manufacturing

Manufacturers and engineers will pay the heaviest price following the
decision to fund a cut in corporation tax with a reduction in capital allowances
for plant and machinery.

The chancellor announced he would cut the allowances for plant and machinery
from 25% to 20% in 2008/09, which will raise £1.4bn for the Treasury in 2008/09
and £2.2bn in 2009/10, more than off-setting the cut in the headline rate.

‘Manufacturers and engineers are going to be the hardest hit. The corporate
tax rate will be cut, but the reduction in allowances will be even greater,’
said Bill Dodwell, head of tax policy at Deloitte.

Hotel companies and retailers will also miss out, following the shuffling
exercise, which saw the abolition of the industrial buildings allowance and the
setting of the integral fixtures capital allowance.

‘Retailers currently benefit from 25% allowance in the first year on around
70% of their new store expenditure. From 2008 this will drop to 20% and if the
new rate for integral fixture is brought in this will reduce further to 10%,’
said David Woodward, head of capital allowances at KPMG.

There will be sectors that will benefit from the changes.

Utilities and infrastructure groups, whose equipment has an economic life of
more than 25 years, are expected to cash in on the rise in the ‘long life’ plant
and machinery allowances from 6% to 10%.

Banks and financial institutions, who do not undertake intensive capital
investment, will be able to take full advantage of the reduced corporate tax
rate without losing out because of the allowance reductions.

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