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Key points * ABAs and IBAs will be phased out from 1 April 2011. * Effect of sudden announcement on business decisions. * Was there an alternative way of dealing with abolition of ABAs and IBAs? * Likely value of next year's allowances is not known.
A PASSING REFERENCE was made in the Chancellor's Budget speech to his proposal to phase out the allowance given for industrial buildings (under Part 3 of the Capital Allowances Act 2001). Budget Note 7, published once the Chancellor's speech had been delivered, explained that both industrial buildings allowances and agricultural buildings allowances (given under Part 4) will be phased out by 2010-11. Actually, as the Red Book makes clear on page 51, the allowances will not be phased out until 1 April 2011. The Budget Notes also referred to the immediate withdrawal of balancing adjustments (with effect for agreements entered into on or after Budget day).
Now that the Finance Bill has been published, a mere 313 pages this year, we can see that only the latter provision has been included. This means that, subject to Parliamentary approval, the legislation relating to the phased abolition of the industrial and agricultural buildings allowances will not become law until 2008.
Surprise
It is fair to say that these changes were not expected. Cynics might suggest that the absence of any legislation relating to the abolition of the allowances in this year's Finance Bill is evidence of the fact that the decision to abolish the allowances was made relatively late, possibly in order to plug a gap in the finances.
Part of the fun of being Chancellor of the Exchequer is that once or twice a year, one can ensure that one's surprise announcements will have the maximum impact. The current Chancellor certainly knows how to gain his audience's attention: for example with his last-minute announcements of the reduction of income tax rates, knowing that they will make the headlines of the newspapers during the following 24 hours.
… and fear
However, a mature politician must also ensure that the business community does not begin to fear the less pleasant surprises that might be sprung upon them by the Chancellor.
In my view, the sudden announcement of the proposed withdrawal of industrial and agricultural buildings allowances represents the kind of Budget proposal that does nothing to inspire confidence in the idea of Britain as being the place in which to do business. In the first half of March, say, there were no doubt a significant number of projects being discussed in boardrooms across the country (and probably elsewhere) which involved substantial amounts of capital being invested in commercial property on the basis that the expenditure would qualify for allowances over the next 25 years. Without warning, many of these projects will have to be re-evaluated because the Chancellor has decided that, rather than give 100% relief over 25 years, relief of only 10% will be given, over a four-year period. And, for those businesses unlucky enough to have already committed themselves, the only consolation is that the loss of tax relief will not be felt for another 12 months.
Political devotion
This year's Budget speech (like those given shortly before a General Election) serves as a reminder that the cause of many of the underlying problems of the UK's tax code is the fact that it is implemented by politicians seeking to augment or maintain a Parliamentary majority.
It is not for me to comment on whether or not industrial and agricultural buildings allowances were appropriately targeted. However, this year's Budget does reinforce the impression that the only stable aspect of the UK's tax regime is its volatility. That is not the way to encourage investment or to attract it from overseas.
It is the Chancellor's right to propose the abolition of allowances. However, he could have done it in a more politically astute fashion by refraining from affecting existing expenditure. For example, he could have allowed such expenditure to continue to qualify for writing-down allowances for the remainder of their writing-down period (25 years in almost all cases, but 50 years for the few remaining industrial buildings where the relevant expenditure was incurred before 6 November 1962). That would have ensured that pre-21 March 2007 expenditure would have qualified for the allowances that the businesses had budgeted for when the relevant expenditure was incurred.
A benevolent Chancellor might also have retained the allowances for expenditure incurred before a pre-announced cut-off date, say 1 August 2007 — or perhaps some much later date. This would have permitted existing negotiations to continue without having been in vain or at least would have allowed the parties to renegotiate prices knowing what was on the horizon.
Furthermore, the fact that the legislation relating to the proposed withdrawal of allowances has not been published in this year's Finance Bill means that the technical details of the changes are not yet in the public domain. In many cases, this will cause few problems in practice.
However, there are, no doubt, some businesses that will want to know the value of next year's allowances. The Budget Note suggests that they will be at the rate of 3% a year. But, presumably that applies only to expenditure which would otherwise have qualified for relief at a rate of 4% a year. Where there has been a transfer of the relevant interest in an industrial building (or where one is dealing with a pre-November 1962 industrial building), the effective rate of writing-down allowance can be more or less than 4%. Will all allowances be reduced by a factor of a quarter? Or will there be a straightforward allowance cap at 3%? Neither system is particularly fair, being retrospective in nature, but the former is probably the more logical of the two.
Ruthless efficiency
As has already been noted, a Chancellor has considerable power when it comes to making changes to the tax system. Chancellors should exercise this power, where necessary, to balance the needs of taxpayers with the needs of the Treasury and the political ambitions of the Government of the day.
The current Chancellor is clearly keen on promoting the concepts of:
- enhancing the international competitiveness of UK based business;
- encouraging growth, through investment and innovation; and
- ensuring fairness across the tax system.
After all, the Treasury (in Budget Note 2) set out these ideas as the key objectives of the business tax reforms being announced in this year's Budget. These are fine objectives and ones that every Chancellor should strive for. Will these be achieved by the abolition of the industrial and agricultural buildings allowances? In my view, the outcome will be, as the catchphrase goes, 'something completely different'.
Keith Gordon MA (Oxon), FCA, CTA, barrister practises from Atlas Chambers (020 7269 7980, www.atlaschambers.com) where he provides tax advice and litigation support for accountants, tax advisers and lawyers. Keith can be contacted by e-mail at keith@keithmgordon.co.uk.
