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The Forum of Private Business (FPB) is warning the Government that giving smaller firms extra capital allowances for investing in plant and machinery will not compensate for recent tax increases.

The FPB is responding to the Government's consultation on the administration of capital allowances, which it hopes will encourage businesses to invest more money in capital.

In his final Budget as Chancellor, in March 2007, Gordon Brown announced plans to allow businesses to write-off 100% of the first £50,000 of its investment in plant and machinery, and to increase the write-off given against taxable profits for long-life assets from 6% to 10%. The FPB's Campaigns Manager, Matt Hardman, welcomed the changes in principle, suggesting that, for the businesses affected, the result would be a "small net positive," but insisted that:

"The changes pale into insignificance when compared to the negative effects of the rise in small firms' corporation tax, also announced in the last Budget, and the increase in capital gains tax revealed in the recent pre-budget report."

The FPB's submission to the consultation welcomes the ‘qualified and imperfect, though well-intentioned, effort' in changing capital allowances. On the other side of the coin, however, by raising the rates of corporation tax and capital gains tax for smaller firms, the FPB believes that the Government has ‘taken two very large steps to discourage investment in very wide cross-sections of the economy.'

In a recent survey, 65% of the FPB's members polled said that a cut in corporation tax would encourage them to invest more. A petition on the FPB's website calling for Capital Gains Tax changes and plans for Supplementary Business Rates to be reversed, has already secured over 500 signatures.

"Capital allowances are all very well for those that qualify," said Mr Hardman, "but if the government really want to encourage business investment, they should look again at this double whammy tax increase."

Patrick Philips owns Kentwell Hall Home Farm, in Suffolk. For 15 years he has benefited from the 4% capital allowance on agricultural buildings. He is concerned by plans to phase this out from April 2008.

"A sudden cut in capital allowances for buildings that were put up in the past seems to me like a form of retrospective taxation," he said. "We will have to pay more tax than we might otherwise have had to. If a business had just invested, say, £1 million in a new machine and then capital allowances on plant and machinery were suddenly whipped away, they wouldn't be best pleased, to say the least."

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Forum of Private Business