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Tax Allowances On Plant & Machinery

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Sunday morning rant.

One thing that drives me mad is the tax treatment of investment in plant & machinery. I am a VI here for sure, spending between £2m and £3m a year on this and with a plan on my desk to sign off on £6m-£7m this coming year.

Now nobody wants waste; it makes us uncompetitive and flushes the nation down the toilet. But apparantly we want business who invest to be World Class and attract business to this country.

So what do we do? We give, effectively, 100% tax allowance to cost but only allow 18% on reducing balance against plant investment. So if I do my £6m investment I get to allocate £1.08m against taxable profit in year one, then 18% of £4.92m the next year, and so on. It takes 8 years before I get just 80% of the value allowed for tax!

Of course, the higher profits that this investment will create will be taxed at full rate, as are the profits of the capital-producing businesses from whom I buy the stuff, so there's a timing difference to the advantage of the state. No surprise there, but that's not my beef - I mention it only to inform any respondant who thinks it necessary to leak out the allowance.

The issue I have is that we need businesses who are prepared to plough profit back into investment, who will take the risks and deferral of cash advantage yet the tax system acts to inhibit this behaviour. I can say this confidence that if all they did was put plant investment on the same footing as general spend there would be a surge in investment and competitiveness; it's what was done with Development areas years ago and it always worked, attracting business to set up.

I'm not after any special favours, I want to spend my own money and in doing so create wealth here (I compete across Europe) and all I want is not to be disadvantaged. A 100% allowance against profit would simply mean I'm taxed on cash surplus, which if you believe in tax seems fair enough. It's not a tax avoidance scam, just not perverse when we want business to invest.

Edited by bogbrush

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The system is crazy, being able to write off costs against taxable earnings just provides jobs for accountants and loopholes for those rich enough to be able able to exploit them. I understand your gripe BB but think the whole thing needs reforming, not just the timescale of these deductables.

In Peston's book Who Run's Britain, he explained that the huge private equity firms who took over companies like Debenhams were able to cook the books in such a way that that HMRC ended up owing them money, despite being v.profitable.

The incentive for them (and you for I guess) is to try and hide your profits away from the taxman, it's no such way to be running an economy.

Edited by Chef

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It should also be 100% tax allowance for any capital investment in Britain. Its sort of sad but I often hear banker types talking about how great capitalism is.. but then forgetting about the capital part. Whereas in Germany there has been a relentless buildup of capital and paying off debt against that capital.

Besides the sheer productive ability of that capital, it also builds barriers to entry. No one in Europe could realistically jump into competition with German manufacturers, regardless of how cheap they made their labour.

The tax code should heavily encourage capital investment in Britain, and freeing that capital from debt. Its a difference between 'capitalism' as practiced in Germany, and 'debtalism' as seen in the US and the UK.

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The system is crazy, being able to write off costs against taxable earnings just provides jobs for accountants and loopholes for those rich enough to be able able to exploit them. I understand your gripe BB but think the whole thing needs reforming, not just the timescale of these deductables.

In Peston's book Who Run's Britain, he explained that the huge private equity firms who took over companies like Debenhams were able to cook the books in such a way that that HMRC ended up owing them money, despite being v.profitable.

The incentive for them (and you for I guess) is to try and hide your profits away from the taxman, it's no such way to be running an economy.

Youre missing the point; it's not about hiding profit, it's being forced to pay tax on cash I don't have. For example, if I make £10m and spend £12m on plant, I have no extra cash at the end of the year BUT pay tax on 10 - (12*.18) = 7.84, @ 27% = £2.12m. So I pay >£2m tax when in fact I've invested all my profit and more.

The system for investing manufacturers does the opposite of tax avoidance, it goes looking for ways to tax businesses on money they literally don't make!!

Edit to add: As an aside, 100% PMAs would reduce work for Accountants.

Edited by bogbrush

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Youre missing the point; it's not about hiding profit, it's being forced to pay tax on cash I don't have. For example, if I make £10m and spend £12m on plant, I have no extra cash at the end of the year BUT pay tax on 10 - (12*.18) = 7.84, @ 27% = £2.12m. So I pay >£2m tax when in fact I've invested all my profit and more.

The system for investing manufacturers does the opposite of tax avoidance, it goes looking for ways to tax businesses on money they literally don't make!!

As an employee the state doesn't take into acount my costs before dipping into my wage packet, so why should employers expect to be treated differently?

If I buy a fridge for my house I'd pay full whack for it and not expect any special allowances from the state, but if I buy it for a business (or at least make it look like I've done that) the state tells me to not worry about the tax. This seems a little contradictory, if reducing the tax is a great idea then lets do this across the board, not just for special people with special paperwork.

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This is the bit I of the tax law that I've just never understood .. if I expend money on capital I have to pay tax on it .. so ..

If I buy a new machine for (say £10,000) then I pay (Mr Bogbrush will explain the EXACT ammount) but about £1500 in tax ..

If I rent a machine for £2000 a year I pay no tax at all (Running cost's Innit)

If I spend £1500 repairing the old machine then I (once again) pay no tax at all ..

This was a massive deal when I was starting up .. as I had no profit to pay the tax, The answer was to buy the various parts of the equipmant as spareparts and then build the machine myself ... Obviously that's not really an option for larger concerns ..

There is a whole ******** industry in the "Leasing" world supported by this sillyness ..

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The system is crazy, being able to write off costs against taxable earnings just provides jobs for accountants and loopholes for those rich enough to be able able to exploit them. I understand your gripe BB but think the whole thing needs reforming, not just the timescale of these deductables.

Nonsense.

How rich or poor Bogbrush may be is not the issue. He's talking about a productive business here. Precisely the kind of business that provides jobs to real people, and pays real money in taxes to fund the state.

Any money Bogbrush is able to extract for his personal use will of course be taxed, even if it's less than the personal (already-taxed) money he's personally invested.

In Peston's book Who Run's Britain, he explained that the huge private equity firms who took over companies like Debenhams were able to cook the books in such a way that that HMRC ended up owing them money, despite being v.profitable.

Private Equity is not the villain. The problem is an environment of perverse incentives, stupidly complex rules, and bubble-levels of leverage, in which spivs flourish. There's a direct analogy to mortgages: in the 19th century they enabled working people to buy a house after several years saving; in the mad times of NuLab they turned housing into a casino. The mortgage per se is not the villain; the abuse of it and perverse incentives are.

There's a nice (and indeed entertaining) insight into private equity in this interview at the Motley Fool.

The incentive for them (and you for I guess) is to try and hide your profits away from the taxman, it's no such way to be running an economy.

If you penalise the productive too much, you turn the honest businessman to thoughts of tax avoidance.

Edited by porca misèria

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It should also be 100% tax allowance for any capital investment in Britain.

It is 100%, it is called AIA annual investment allowance. Unfortunately a certain G Brown set this at £50,000 for businesses of EVERY SIZE.

Before companies used to get first year allowance which was 50%, or 100% if they were things the government wanted you to buy such as more efficient (energy wise) machinery or energy saving lightbulbs. Or dual flush toilet things.

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This is the bit I of the tax law that I've just never understood .. if I expend money on capital I have to pay tax on it .. so ..

If I buy a new machine for (say £10,000) then I pay (Mr Bogbrush will explain the EXACT ammount) but about £1500 in tax ..

Eh? You don't pay tax on t hat £10,000 machine at all. Where would you get that idea from?

At the end of the year you can wipe out 18% of the capital cost i.e. £1800 off your taxable profits.

Therefore if you had £20000 of profits you now have £18200 of profits which are taxable not £30000 which is taxable.

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As an employee the state doesn't take into acount my costs before dipping into my wage packet, so why should employers expect to be treated differently?

If I buy a fridge for my house I'd pay full whack for it and not expect any special allowances from the state, but if I buy it for a business (or at least make it look like I've done that) the state tells me to not worry about the tax. This seems a little contradictory, if reducing the tax is a great idea then lets do this across the board, not just for special people with special paperwork.

Which is the prime benefit of self employment as it allows you to claim back almost anything and everything you spend on day to day work expenses. HMRC doesn'rt like this as they lose 4% in NIC and a big chunk of taxes because people get 28% tax relief on their day to day expenses.

The HK system works nicely as it takes into account some home expenses....

I do agree that expenses of employment as a payroll slave should be claimable as it gives self employed types a huge advantage. I suppose it is risk/reward factor though and the temptation to cheat is huge.

I still think the UK should have an education allowance though (HK has it) whereby if you study to improve your prospects and or abilities, there is no tax relief for this, therefore there is no encouragement other than extra money to stufy harder.... because you'll be taxed a shed load on the extra anyway.

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It is 100%, it is called AIA annual investment allowance. Unfortunately a certain G Brown set this at £50,000 for businesses of EVERY SIZE.

Before companies used to get first year allowance which was 50%, or 100% if they were things the government wanted you to buy such as more efficient (energy wise) machinery or energy saving lightbulbs. Or dual flush toilet things.

My business got a great efficiency aid: a folding bicycle that goes on the train for business travel. So for example visiting my occasional clients in Yeovil I could travel the 3 miles or so of narrow lanes from the station to their site. Good green credentials there, when you compare it to a company car (which I've actively refused). Still took four years to write down the value against tax.

(and, erm, before you ask, I have a much nicer - and more expensive - bike for personal use. It's just less useful for business travel because being full-sized it's a lot of hassle to take on the train).

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I do agree that expenses of employment as a payroll slave should be claimable as it gives self employed types a huge advantage. I suppose it is risk/reward factor though and the temptation to cheat is huge.

You talking about things like commuting and canteen-lunches there? If so, agreed.

I still think the UK should have an education allowance though (HK has it) whereby if you study to improve your prospects and or abilities, there is no tax relief for this, therefore there is no encouragement other than extra money to stufy harder.... because you'll be taxed a shed load on the extra anyway.

Given the truly scary talk of much-more-expensive degrees, it seems strange that tax breaks for those fees don't seem to feature in our mainstream debate.

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As an employee the state doesn't take into acount my costs before dipping into my wage packet, so why should employers expect to be treated differently?

If I buy a fridge for my house I'd pay full whack for it and not expect any special allowances from the state, but if I buy it for a business (or at least make it look like I've done that) the state tells me to not worry about the tax. This seems a little contradictory, if reducing the tax is a great idea then lets do this across the board, not just for special people with special paperwork.

So you advocate taxing sales not profit?

You are completely missing the point about taxable income and expenses. Honestly, you are. It's nothing to do with "special paperwork", it's a business expense like wages. So your position seems to be that an expense like wages should not be deducted from sales revenue before tax.

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Sunday morning rant.

One thing that drives me mad is the tax treatment of investment in plant & machinery. I am a VI here for sure, spending between £2m and £3m a year on this and with a plan on my desk to sign off on £6m-£7m this coming year.

Now nobody wants waste; it makes us uncompetitive and flushes the nation down the toilet. But apparantly we want business who invest to be World Class and attract business to this country.

So what do we do? We give, effectively, 100% tax allowance to cost but only allow 18% on reducing balance against plant investment. So if I do my £6m investment I get to allocate £1.08m against taxable profit in year one, then 18% of £4.92m the next year, and so on. It takes 8 years before I get just 80% of the value allowed for tax!

Of course, the higher profits that this investment will create will be taxed at full rate, as are the profits of the capital-producing businesses from whom I buy the stuff, so there's a timing difference to the advantage of the state. No surprise there, but that's not my beef - I mention it only to inform any respondant who thinks it necessary to leak out the allowance.

The issue I have is that we need businesses who are prepared to plough profit back into investment, who will take the risks and deferral of cash advantage yet the tax system acts to inhibit this behaviour. I can say this confidence that if all they did was put plant investment on the same footing as general spend there would be a surge in investment and competitiveness; it's what was done with Development areas years ago and it always worked, attracting business to set up.

I'm not after any special favours, I want to spend my own money and in doing so create wealth here (I compete across Europe) and all I want is not to be disadvantaged. A 100% allowance against profit would simply mean I'm taxed on cash surplus, which if you believe in tax seems fair enough. It's not a tax avoidance scam, just not perverse when we want business to invest.

Firstly there is an investment allowance of £100k which can be written off the taxes straight away (OK, peanuts compared to £5m, but now you

are dealing with £4.9m, no £5m).

Secondly, did you fund the investment using your own cash as opposed to borrow from the bank or lease it from people like GE Capital ? If so,

those interest and leasing cost are tax deductible. The idea is not that much different from if you buy a building for your factory, you don't get to write off the whole

cost against taxes as the machines/buildings are still there. The reasons opex are written off 100% against income are because the value spent is 'gone'.

I am not aware of any country that allows the capex (other than a small amount like £100k) to be written off against taxes right away.

I suppose the other way round this is to place a 'charge' on your machinery/factory by HMRC and let you write off 100% of

the capital cost but if you sell it before the 8 year period, then you are liable to repay some of the tax benefits via balancing charges. ( I suppose

this will resolve your timing issues).

The problem with debt/lease are tax deductible creates an interesting situation where companies are encouraged to use debt as opposed to use equities (using own cash vs borrowed cash).

Tax is by its nature distorting and so we odd to minimise the distortion through lower tax rates. So, if tax rate is 0% (say a system purely funded by VAT or custom duties- but that cause other problems, of course) , then the issue you mention won't have arisen. If the tax rate is 10%, then perhaps that will cause you less problem as well.

@ken : £100k AIA since April 10 by Mr Darling...

Edited by easybetman

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Firstly there is an investment allowance of £100k which can be written off the taxes straight away (OK, peanuts compared to £5m, but now you

are dealing with £4.9m, no £5m).

Secondly, did you fund the investment using your own cash as opposed to borrow from the bank or lease it from people like GE Capital ? If so,

those interest and leasing cost are tax deductible. The idea is not that much different from if you buy a building for your factory, you don't get to write off the whole

cost against taxes as the machines/buildings are still there. The reasons opex are written off 100% against income are because the value spent is 'gone'.

I am not aware of any country that allows the capex (other than a small amount like £100k) to be written off against taxes right away.

I suppose the other way round this is to place a 'charge' on your machinery/factory by HMRC and let you write off 100% of

the capital cost but if you sell it before the 8 year period, then you are liable to repay some of the tax benefits via balancing charges. ( I suppose

this will resolve your timing issues).

The problem with debt/lease are tax deductible creates an interesting situation where companies are encouraged to use debt as opposed to use equities (using own cash vs borrowed cash).

Tax is by its nature distorting and so we odd to minimise the distortion through lower tax rates. So, if tax rate is 0% (say a system purely funded by VAT or custom duties- but that cause other problems, of course) , then the issue you mention won't have arisen. If the tax rate is 10%, then perhaps that will cause you less problem as well.

@ken : £100k AIA since April 10 by Mr Darling...

This will be funded from cash flow, so interest doesn't come into it. Indeed we invest for the very long term and ignore tax, but sadly not many businesses are run like that and for UK plc to thrive we need to take account of how "normal" businesses do it.

There is still no logical reason for denying 100% alowance; if "value" remains then it will show in higher future profits, which will be taxed. If the value is sold it will be taxed as income (since it will be 100% excess over written down cost) so need for the "charge" idea. The business cannot gain an advantage through 100% allowance, it simply brings taxable profit closer to cash surplus.

The system is a straightforward disincentive to invest, pure and simple. Spend £10m now to make a great business in the future, and God knows we're going to need them, or @rse around using obsolete technology and maximise your short term cash flow. If I were trying to rig a system to get me somewhere I want I'd be allowing 100% on investment.

Hell, bear in mind the profit on the capital provision is all taxed straight away, so there isn't even a timing problem to HMRC!!!

Edited by bogbrush

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This will be funded from cash flow, so interest doesn't come into it.

Heh a smart busines person would outsource his company to China pay the workers there 1/50th of what they pay in the UK, make everybody in the UK redundant and write the expenses of outsourcing and redundancy off the tax bill.

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Heh a smart busines person would outsource his company to China pay the workers there 1/50th of what they pay in the UK, make everybody in the UK redundant and write the expenses of outsourcing and redundancy off the tax bill.

Many do, but I'm smarter than them. ;)

I'm the one with higher profit margins (now) and a supply close to market, highly responsive and immune from the threat of higher labour costs in developing economies.

It pays to think long in business, but not many do.

Edited by bogbrush

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This will be funded from cash flow, so interest doesn't come into it. Indeed we invest for the very long term and ignore tax, but sadly not many businesses are run like that and for UK plc to thrive we need to take account of how "normal" businesses do it.

There is still no logical reason for denying 100% alowance; if "value" remains then it will show in higher future profits, which will be taxed. If the value is sold it will be taxed as income (since it will be 100% excess over written down cost) so need for the "charge" idea. The business cannot gain an advantage through 100% allowance, it simply brings taxable profit closer to cash surplus.

The system is a straightforward disincentive to invest, pure and simple. Spend £10m now to make a great business in the future, and God knows we're going to need them, or @rse around using obsolete technology and maximise your short term cash flow. If I were trying to rig a system to get me somewhere I want I'd be allowing 100% on investment.

Hell, bear in mind the profit on the capital provision is all taxed straight away, so there isn't even a timing problem to HMRC!!!

I take it as you meant there is NO need for the 'charge' idea. I suppose not every business man is honest (e.g. VAT carousel fraud). So I suppose someone could have a barely profitable business (which was profitable and paid taxes in the past), then do a backroom deal to get a £10m equipment from a friendly company (which is subjected to retention of title) and then claim the allowances, get tax refund, move the cash to tax heaven and run. The friendly company then seize the equipment due to non payment and HMRC is nursing the losses.

Out of curiosity - why are you investing in the UK - what the strength of the country (other than patriotism) that keeps you here ?

If you notice though, people like Mr Buffet tends to invest in businesses that requires little capex..

Edited by easybetman

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It pays to think long in business, but not many do.

Oh sure I know this but short termism is a very British thing. Its probably something to do with the way the UK relies on uber inflation all of the time thus your £££ today is worth more than your £££ tomorrow.

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I favour some sort of simplified tax system where only money taken out of the business for personal expenditure is taxed at all. Some sort of website where HMRC would debit your drawings from the business account and deposit them in your personal account less any tax, which they calculate, due.

As a previous poster has mentioned, and what many don't realise when they're railing against the evils of borrowing money. For businesses it's often more tax efficient to do so.

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I take it as you meant there is NO need for the 'charge' idea. I suppose not every business man is honest (e.g. VAT carousel fraud). So I suppose someone could have a barely profitable business (which was profitable and paid taxes in the past), then do a backroom deal to get a £10m equipment from a friendly company (which is subjected to retention of title) and then claim the allowances, get tax refund, move the cash to tax heaven and run. The friendly company then seize the equipment due to non payment and HMRC is nursing the losses.

If you don't pay the money and take title then you can't have the offset.

Out of curiosity - why are you investing in the UK - what the strength of the country (other than patriotism) that keeps you here ?

If you notice though, people like Mr Buffet tends to invest in businesses that requires little capex..

Good question, and I hope an interesting answer to follow.

I believe that you can only be highly profitable if you do something with value which you happen to really enjoy doing. I enjoy manufacturing; I love it; I love the intellectual challenge, the achievement of producing something useful from base material, the buzz from doing it better than anyone else. Hence that's what I must do. I could not do business in trading because it bores the t1ts off me and I'd therefore be unhappy and not much good at it.

I also find the challenge of UK manufacturing highly profitable BECAUSE it's been so difficult. This creates an opportunity to highly differentiate from the competition (as I keep explaining to Boom Boom, I personally profit from the NMW while saying it's bad for people long term). I also live here and am not interested in managing a business by remote control.

I am in business to make money and we are very profitable, but I believe profit is the result of doing the right things well, not a focussable objective in itself. It drops out the end of a well run operation, and so I concentrate on sustainably adding the most value to customers for the least cost, and the profit at the end it simply proof of the soundness of the strategy, and extent of its achievement.

I am not Mr Buffett, I am not an "investor", I am a hands-on business operator.

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So you advocate taxing sales not profit?

You are completely missing the point about taxable income and expenses. Honestly, you are. It's nothing to do with "special paperwork", it's a business expense like wages. So your position seems to be that an expense like wages should not be deducted from sales revenue before tax.

What I'm saying is that if employers are able to write off expenses before tax then employees should be able to do the same with their costs, this would be fairer. You seem to be arguing for a lopsided system where employers are treated as special cases based on the notion that they perform a special function in society, I don't agree with this. Employers and employees both add value and their efforts should be treated equally before HMRC.

If the logical outcome is a sales tax that is blind to production costs (like wages are with the cost of rent and food etc) then this is one answer, it would certainly be a lot simpler and prevent abuses of the system that only employers are currently allowed to get away with, (is that widescren plasma T.V really an essential business expense?)

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What I'm saying is that if employers are able to write off expenses before tax then employees should be able to do the same with their costs, this would be fairer. You seem to be arguing for a lopsided system where employers are treated as special cases based on the notion that they perform a special function in society, I don't agree with this. Employers and employees both add value and their efforts should be treated equally before HMRC.

If the logical outcome is a sales tax that is blind to production costs (like wages are with the cost of rent and food etc) then this is one answer, it would certainly be a lot simpler and prevent abuses of the system that only employers are currently allowed to get away with, (is that widescren plasma T.V really an essential business expense?)

It would be mad, and for the simple reason that it would multiply tax;

Business A sells for £50 to Business B. Tax on £50

Business B adds a bit of value and sells to Business C for £80 (including the £50 he paid). Tax on £80, the first £50 now taxed twice.

Business C adds a bit of value and sells to Business D for £200 (including the £80 he paid). Tax on £200, the first £50 taxed thrice and the second £80 twice.

Total tax based on £330 for an item worth £200. A system designed to destroy trading overnight. I hope you'll agree it is not a good idea.

Turning to your other point, business is no "special case"; your wage is all taken to be profit so it's taxed, same as a business paying tax after costs. Rent and food are not costs incurred in the course of carrying out the trade - you would have lived and eaten without the job - so they aren't offset against wages of trade. If businesses spend money that are not deemed to be incurred in the course of their trade (such as entertainment) they aren't allowed now.

EDIT: I did not argue for a special case for anyone based on a "notion that they perform a special function in society". Please don't turn into a fool like wonderpup, ascribing sinister motives.

Edited by bogbrush

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What I'm saying is that if employers are able to write off expenses before tax then employees should be able to do the same with their costs, this would be fairer. You seem to be arguing for a lopsided system where employers are treated as special cases based on the notion that they perform a special function in society, I don't agree with this. Employers and employees both add value and their efforts should be treated equally before HMRC.

If the logical outcome is a sales tax that is blind to production costs (like wages are with the cost of rent and food etc) then this is one answer, it would certainly be a lot simpler and prevent abuses of the system that only employers are currently allowed to get away with, (is that widescren plasma T.V really an essential business expense?)

I agree with you that employees should be given fixed allowance to write off their cost which is necessary to do their job/to remain employed (e..g say £2500 pa to write off against travelling etc). The government argument is that it is people choice to have to travel far to work and hence no tax deductible. Of course, Ltd company contractors / self employed people are allowed to call these expenses...

I suppose the ultimate problem is that tax is by its nature distorting and the lower the rate, the less distortion it will be (40% on £2500 is lots of money, while if it is 15%, then it is less of an issue).

Edited by easybetman

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If you don't pay the money and take title then you can't have the offset.

Good question, and I hope an interesting answer to follow.

I believe that you can only be highly profitable if you do something with value which you happen to really enjoy doing. I enjoy manufacturing; I love it; I love the intellectual challenge, the achievement of producing something useful from base material, the buzz from doing it better than anyone else. Hence that's what I must do. I could not do business in trading because it bores the t1ts off me and I'd therefore be unhappy and not much good at it.

I also find the challenge of UK manufacturing highly profitable BECAUSE it's been so difficult. This creates an opportunity to highly differentiate from the competition (as I keep explaining to Boom Boom, I personally profit from the NMW while saying it's bad for people long term). I also live here and am not interested in managing a business by remote control.

I am in business to make money and we are very profitable, but I believe profit is the result of doing the right things well, not a focussable objective in itself. It drops out the end of a well run operation, and so I concentrate on sustainably adding the most value to customers for the least cost, and the profit at the end it simply proof of the soundness of the strategy, and extent of its achievement.

I am not Mr Buffett, I am not an "investor", I am a hands-on business operator.

Thanks for the insight bogbrush.

Other than the tax deductibility of investment allowance, what are the main items that prevent you from creating value?

Is land cost (and hence your site cost as well as your employee's ultimate cost of living) a big issue ?

Do you consider yourself to be in high tech manufacturing? Or are you in low volume customised manufacturing sectors? (Just about the 2

which I think can be run profitable from the UK).

Did you start this small and grow through profit retention and reinvestment or had huge capital injection at the start ?

Thanks in advance...

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