asked the Minister for Finance whether he proposes any changes with regard to tax relief on capital expenditure in the context of industrial promotions policy.
Written Answers. - Capital Expenditure: Tax Relief.
30.
This year's Finance Bill contains the changes in capital allowances which I announced in the budget as part of a major reform of the corporation tax code. There will be a phased reduction in the first year capital allowances for plant, machinery and industrial buildings, from 100 per cent to 50 per cent. Of course, the normal wear and tear allowances will be available to write off over a number of years the balance of expenditure which is not written off by the reduced first-year allowances. The reduction in accelerated capital allowances has to be taken in the context of the parallel reduction in tax rates, which is the other major element of the corporation tax reform. The new capital allowances will remain unchanged until 1991.
Certain specific exceptions to the reduction in capital allowances have been allowed for in the Finance Bill — they will not apply to expenditure incurred under contracts entered into on or before budget day, or to projects which are approved by the industrial development agencies by 31 December 1988.
For manufacturing companies which have of course the special low tax rate of 10 per cent, the reduction in capital allowances will be of much less importance than for companies liable at the standard rate of 47 per cent.
A likely effect of the reduction in capital allowances will be to boost industrial investment in the short term as companies take advantage of the existing higher rates. In addition, I would point out that our capital allowances have been, by any standards, very generous and they have led to certain distortions in favouring capital investment over employment. The changes I have made will redress the balance.