Less than zero

Most tax and funding incentives for business announced in the budget are targeted at high-tech businesses, and the increasing burden of employer taxes, combined with the forthcoming changes to the Construction Industry Tax Deduction Scheme, will increase both the financial cost and the administrative burden for most building businesses.

The DETR did announce that a green paper on housing policy is to be published later in the year, focusing mainly on the provision of social housing, as is another white paper on urban improvement, which may give some encouragement to the sector.

It is unlikely that the withdrawal of mortgage tax relief will have a significant effect on the housebuilding sector, given the downward trend in interest rates. The increased stamp duty rates may, however, put pressure on commercial development and the higher end of the residential sector.

The extension of the 40% capital allowances for plant and machinery for a further year, available only to small and medium-sized enterprises, is to be welcomed. But the introduction of the lower 10% rate of corporation tax from April 2000 will be of limited benefit, since it is available on annual taxable profit of up to £10 000, increasing on a sliding scale to 20% at a profit of £50 000.

However, there may be some benefit for smaller, owner-managed companies where most of the profit is taken as salary. These companies could retain profit to be taxed at a lower rate in the company and take it as dividends, with no National Insurance costs. The 0.5% reduction in employers’ NI contributions, announced in the budget, does not take effect until April 2001 and is overshadowed by the previously announced increase of 2% starting this month, combined with the extension next year to cover all taxable benefits in kind announced in the budget. This, taken with the attack on personal service companies and the increasingly restrictive CITDS rules, can only increase labour costs for most builders.

For many businesses, the changes to the VAT regulations will represent a very significant cost

The apparent U-turn on the proposed introduction of a general anti-avoidance provision for direct taxes is to be welcomed. Most advisers to the property sector also heaved a sigh of relief when the chancellor did not bring forward general VAT anti-avoidance legislation. But the budget did contain two specific VAT anti-avoidance measures that will directly affect the industry.

The first affects customers, specifically businesses operating in the financial sector and other bodies such as schools and charities, which cannot fully recover VAT. These will no longer be able to make an early election to charge VAT on renting out a building that is still to be constructed or refurbished and which will be occupied by manufacturers of supplies exempt from VAT. For many such businesses, this measure will represent a very significant cost. It will undoubtedly result in a scaling-down of both existing and future building programmes by affected businesses, and step up the pressure on the building sector to trim costs.

Second, the regulations will remove the condition that contractors account for VAT on construction services 18 months after they have been performed, if payment has not been made or a VAT invoice issued. It will be replaced by a new rule to apply from 9 June 1999.

Under this rule, VAT will become due on completion of construction services where the contractor or the person financing the transaction expects that the property to which the services relate will be used largely to make VAT-exempt supplies. The change will require some contractors to amend their accounting systems. In addition – although we have yet to see the legislation – on a literal reading of the Customs and Excise proposals, contractors will, arguably, need to find out from their customer to what use a building will be put if VAT is to be accounted for on time. It is to be hoped that whatever legislation is brought forward, it will not be yet another layer of administration for the industry.