Spring Property Survey: Budget's tax changes hit moving plans: The cap on expenses is under attack, reports Helen Hague

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The Independent Online
THE GOVERNMENT stands accused of encouraging companies planning a move to another part of the country to sack workers and hire afresh in their new chosen location.

The claim comes not from the trade unions, but from the Confederation of British Industry (CBI), in response to one of the cash-strapped Chancellor of the Exchequer's strategies to boost depleted Treasury coffers.

In last month's Budget, Norman Lamont announced plans to put an pounds 8,000 cap on relocation expenses. Tax relief for additional housing costs incurred by those moving into more expensive areas are also being withdrawn.

The move comes on top of a slump in the housing market that has already led to spiralling costs for employers who decide to relocate.

Providing bridging loans or using a relocation agency to buy and resell the houses of staff who move does not come cheap: the CBI estimates relocation packages cost, on average, pounds 25,000 per employee. In addition to housing costs, packages can include anything from funding family visits to the new location to providing help in finding appropriate schools for children, all in an attempt to woo staff to make the move.

In the wake of the Chancellor's tax-capping announcement, the CBI predicts company relocation costs could rise by up to 50 per cent.

According to Howard Davies, the director-general of the Confederation, 'firing and hiring' could be foisted on companies trying to restructure and reorganise.

The tax relief cap is threatening to hamper employee mobility and land companies with a hefty extra bill just as the recession begins to lift, he warns.

The Budget announcement came just before the Confederation's annual relocation conference last week at which Mr Davies predicted dire consequences.

'The relocation of employees is crucial to business success,' the director-general told delegates at the conference. 'It is essential for companies to be able to move people quickly and cost- effectively to where they are needed to respond to market conditions.'

More than 1.7 million homeowners are caught in the negative equity trap - where mortgage debt outstrips the market value of their property. While large companies intent on coaxing important staff to make the move should have few problems stumping up the shortfall, it is not an option that is open to smaller firms operating on tight budgets.

The recession has made many companies think twice about relocation, says Jean Crawford, who is head of research at Jones Lang Wootton. There is now a glut of available office space in London at rates that were undreamt of in the late 1980s. Major company relocations tend to have three-year lead times. In 1991, 36 organisations moved out of London; last year it dropped to 23 and now there are just 15 in the pipeline.

The public sector has played a pivotal role in moving jobs out of the South-East - such as the dispatch of staff at the Employment Department to new offices in Leeds and Runcorn and the Department of Social Security's move to Leeds.

The Inland Revenue is in the midst of a move to Nottingham. However, plans for the Prison Service to move to Derby are now on ice, as is the proposal to move English Heritage, grabbing headlines under its controversial new chief, Jocelyn Stevens, to Nottingham.

But there can still be compelling reasons to make the move: these include closeness to markets, availablity of skilled labour and company restructuring to streamline and cut costs.

Ms Crawford of Jones Lang Wootton predicts that relocations, driven by stategic business objectives, will still occur. In the wake of the Chancellor's tax relief cap it will 'still be a matter of doing the equation between one-off costs and future savings'.

Steven Bell, chief economist with Morgan Grenfell, says that many career-minded young professionals are fighting shy of buying their own home. They have seen too many colleagues saddled with an over-priced, hard-to-shift property bought at a time when prices seemed to rise relentlessly month by month.

One in four homeowners in the South-East have fallen victim to negative equity. Although mortgage rates have tumbled and rents have risen, the need for job mobility still makes renting an attractive option.

John Carolan, managing director of Black Horse Associates, believes companies that decide to go ahead with a planned relocation will end up picking up the tab for a heftier tax bill.

'If you are relocating someone from one end of the country to another you can hardly expect an employee to pay tax on the reimbursement of direct expenses,' Mr Carolan says. 'The majority of companies which decide on a move are likely to 'gross up'.'

He also believes that the Chancellor may have got his sums wrong. The Inland Revenue estimates that the tax relief cap will yield pounds 200m to boost Treasury coffers in the 1994/95 period - when an estimated 100,000 employees will be liable for extra tax. It further calculates that an annual pounds 250m will be raised through the cap in the longer term.

Mr Carolan is deeply sceptical of such claims. 'I think they are greatly overestimating the number of people who will pay more tax. If it puts companies off relocating by loading costs it will not raise the hoped for revenue. But it could stop moves which make sound commercial sense - which cannot be good for British industry or for the economy.'

And, of course, it won't do the moribund housing market any favours either.