WHILE Gordon Brown's proposals for a complete overhaul of the capital allowances system may prove beneficial for many, it could also prove financially devastating for others, warns Worcester-based accountants Crowther Beard.

Originally introduced in the late 1940s in order to encourage urban regeneration, a system of allowances was created to give businesses tax incentives for investment. Now defined as "capital allowances" businesses are able write off a proportion of the cost for certain purchases and investments against their taxable profits, usually over a number of years, therefore reducing their tax bill.

Predominantly, the system is available for plant, machinery and industrial buildings, research and development.

Over the years the system has become increasingly and often unnecessarily complex and therefore a complete overhaul has been long anticipated, although many of the proposals set to be introduced were not.

Crowther Beard's tax expert Chris Hobbs said: "From April 2008 the Government has proposed to introduce a new annual investment allowance for the first £50,000 of expenditure spent on equipment in one year.

"This allowance should cover most items of plant and machinery purchased by the smaller business.

"Smaller businesses can now claim a 50 per cent first year allowance for the cost of equipment purchased before April 2008, if it exceeds £50,000.

"On the other end of the scale, however, it is proposed that the capital allowances that are currently available for the cost of buildings are to be phased out by 2011 which could have massive financial implications for businesses in the development industry, such as hotels.

"This will not be helped by the fact that the current rate of 25 per cent, where equipment is fixed in a building used for a business, will be reduced to 10 per cent per year from 2008.

"As always with Mr Brown, for every winner there is ultimately a loser. With most of the changes not coming into place until April 2008, businesses still have time to prepare and adjust for these changes and should consult a professional tax advisor with any queries."