Echoes of Nigel Lawson in Brown's company tax reform

British business could be about to indulge in a spending splurge not seen since a youthful MP called Gordon Brown first attended a Budget in the House of Commons in 1984.

The current Chancellor heard the then Chancellor, Nigel Lawson, pre-announcing plans to slash corporation tax the next year to 45 per cent, then 40 per cent, then 35 per cent. The huge tax cut would be paid for by similarly slashing the capital allowances available to companies spending on plant equipment and machinery.

Businesses reacted to the reforms - which came into effect in 1985 - by bringing spending forward to take advantage of the high capital allowances before the cuts came into force. This resulted in a 20 per cent increase in business investment in 1984. The result - the economy received a much-needed shot in the arm.

Mr Brown's tax cut of 2 per cent to corporation tax, combined with a reduction in capital allowances to 20 per cent from 25 per cent, pales in comparison to the radical reforms put in place by Mr Lawson.

But economists at Dresdner Kleinwort argue that there could be a similar effect to 1984. And if it this feeds through into a boost to economic growth, that would be a more than useful string to the bow of a future Prime Minister Brown, should he decide to call an early, snap election.

David Owen, chief European economist at Dresdner Kleinwort says: "If you combine the corporate tax changes with the growth in public spending that has been announced, that means 2007 could be a stronger year for growth than expected."

Whether this will happen is open to debate - but what is certain is that the changes to corporate tax in 2007 have in effect rewarded big, rich, profitable companies while squeezing the struggling poor.

Old-style socialists may liken themselves to Robin Hood by seeking to tax the rich to help the poor. But when it comes to British business, the Chancellor has become a latter-day Sheriff of Nottingham.

In identifying those who have won thanks to Sheriff Brown, Bill Dodwell, a tax partner at Deloitte says: "Clearly we are looking for companies with high profits relative to the routine investments that they have to make. So banking and other financial services will do well. They do have to spend, on things such as computers and software, but they make so much money that they will still benefit from the 2 per cent cut to corporation tax."

As for the losers: "They will be less profitable companies and we fear that will include manufacturers and engineering companies as well as people not making a lot of profit generally."

Mr Dodwell is cautious about the prospects for the sort of spending splurge that Mr Owen believes is possible. He says this is because Mr Brown's changes are much less dramatic than Mr Lawson's. However, he agrees that companies would benefit from bringing spending forward into 2007 rather than in 2008 when the changes come into force.

He also sees a net benefit to the stock market. "The changes do not take place until next year but they will affect the provisioning companies do now. They will be able to cut the amount of money they set aside for tax, for example. While they won't see a cash benefit this year, it will boost their accounting profit and earnings per share. It will be interesting to see if that results in a rise in the stock market."

Georgina Taylor, a Goldman Sachs strategist, is the first to have analysed which stocks might benefit from Mr Brown's changes, although she is wary of changing recommendations on individual shares as a result.

Nonetheless, her report suggests that profit growth in corporate Britain will increase from 8.9 per cent (excluding financials) to 10.2 per cent in 2008.

In the report, she has looked at the overall picture of the tax changes - measuring the effect of the 2 per cent cut in corporation tax, the reduction in capital allowance for general plant and machinery investment, and an increase in the capital allowance for long-life plant and machinery investment from 6 per cent to 10 per cent.

Based on this she has created a screen to find the winners which looks at companies currently burdened with high effective tax rates, but with low capital expenditure to sales and low interest expense versus earnings.

They come from a variety of sectors including, for example, metal bashers such as Smiths Group and Rolls-Royce. They may have high capital expenditure but are also highly profitable so reap the benefits from the 2p tax cut.

Retailers such as French Connection, Game Group and WM Morrison also do well, as do builders such as Wilson Bowden and Persimmon.

What Ms Taylor's research suggests is that it is difficult to come up with a hard and fast rule about which stock market sectors do well and which suffer. Instead, one has to look at individual companies, their capital structures and how profitable they are.

But she says the losers will be "capital intensive industries focused more in technology and shorter-term investment".

Accountants have also suggested that hoteliers, which it has been estimated receive capital allowances on 40 per cent of their total expenditure, and those with large property portfolios will suffer.

Gambling companies were hit by increases to casino tax and the refusal to end VAT on bingo.

However, their travails are as nothing when compared with the impact on small, unquoted businesses, whose tax rates are set to rise from 19 per cent to 22 per cent over the next three years.

The reason is to make it less attractive for individuals to duck income tax by incorporating. The Chancellor was at pains to point out that small businesses have been given allowances on investments to help compensate.

But the sector's lobby groups believe many will struggle to make use of these allowances and even the CBI, whose members are drawn from Britain's corporate titans, has voiced fears about the impact on the economy of squeezing small business.

Critics of the new Sheriff of Nottingham have warned that the tax rises will force small businesses battling at the margins of profitability into difficulties. Those that run these businesses will have to go cap in hand to the small business adviser at their banks to ask for more money, or more time to repay loans.

As they regard their adviser's shiny new suit, funded by the year's profit-related bonus, they will have good reason to cast evil eyes in the direction of Westminster.

Of course, in an ideal world, the banks would be able to use the windfall from the Chancellor's tax cut to ease the pressure on their customers. Just don't bank on it.

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