Revenue to change rules to offset millennium bug costs

GORDON BROWN will announce in next week's Budget a tax break to help companies tackle the "millennium bug" problem. The Inland Revenue will allow companies to set spending on special computer software against their tax bill, at a cost in foregone corporation tax revenue of as much as a few billion pounds.

The millennium problem arises because older computer programmes wrote dates as two- figure numbers when computer memory was more expensive. Some systems will therefore run into huge problems when the first two figures of the date change from "19" to "20" in the year 2000.

Although the extent of the "Y2K problem" has become the subject of extraordinary hype by some consultants, companies have said it will cost the hundreds of millions of pounds to fix. Zeneca and Royal Sun Alliance have both said they expect to spend pounds 100m, and Unilever has put the cost at pounds 250m.

The new tax measure, to be spelt out in an article in the April edition of Tax Bulletin, clears up an uncertainty about exactly what year 2000 spending could be set against taxable profits. Purchases of off-the-shelf software will qualify for this treatment.

However, spending on big new projects such as upgrading the company's computer hardware, will continue to have to be written off gradually for tax purposes at a rate of 25 per cent of the remaining balance each year.

The measure will be an incentive for companies to fix their existing computer system rather than junking it for a new one.