Budget '97: Capital allowance boost for small firms

Business Taxes: INVESTMENT INCENTIVES

Small businesses and their advisers broadly welcomed the Chancellor's measures aimed at stimulating a sector of the economy that he saw as the main future provider of jobs.

Both the Forum of Private Business and the Federation of Small Businesses welcomed the doubling of first-year capital allowances to 50 per cent to encourage investment in plant and machinery. Mr Brown said the move would benefit 3.5 million businesses, or 99 per cent of the UK's firms.

By announcing incentives now rather than - as was usual - at a time of recession, Mr Brown hoped to bring forward investment in a key sector and so help to "sustain growth in the economic cycle," said the Treasury. The measures were focused on reducing the tax burden on small and medium- sized companies and fostering the climate for investment and growth, it added.

However, the Institute of Directors, which has many members in growing enterprises, criticised the fact that the increase in the allowances for machinery and plant would revert to 25 per cent in subsequent years. This would "distort investment plans and contribute to the overheating of the economy which the Chancellor is trying to rein back, while offering no permanent benefit," it said.

Paul Wopshott, tax partner with Price Waterhouse, added: "Investment decisions are not one-off and are often part of a long-term programme. A temporary doubling of first-year allowances is unlikely to provide the stability to the decision-making environment that the Chancellor desires."

The Treasury also announced action on Venture Capital Trusts and the Enterprise Investment Scheme, both of which had been introduced towards the end of the Conservative government as a means of encouraging individuals to fund early-stage and expanding businesses in return for tax relief. The first VCTs have raised more than pounds 350m, while more than pounds 100m has been invested in nearly 1,000 companies under the EIS.

However, there has been evidence that the schemes are being used to finance guaranteed or property-backed investments, and the Government is consulting on ways of shifting the focus back to the intended target.

Jonathan Clarke, chairman of the taxation committee of the British Venture Capital Association, said he very much welcomed changes to "ensure that VCTs will effectively provide equity capital to smaller unquoted UK companies".