West Midlands' manufacturers face crippling extra costs as a result of impending changes to tax legislation in April, advisers at Ernst & Young in Birmingham have said.

Chancellor of the Exchequer Alistair Darling is planning to phase out the industrial buildings allowance (IBA) over the next three years, which will cost affected businesses billions of pounds in lost tax relief.

The Chancellor, who will finalise his proposals in next month's Budget, has provoked further outcry from the sector by proposing to introduce the changes retrospectively.

IBA was introduced in 1945 to boost post-war reconstruction in the manufacturing and processing industries but now covers a much wider range of structures such as tunnels, bridges, some roads and hotels, as well as commercial buildings in enterprise zones.

In addition to manufacturing, the agricultural, transport and hotel sectors will also be affected by the changes.

"A qualifying company can claim an annual allowance of four per cent on the structure which means the construction cost could historically be written off on a straight-line basis over 25 years," said Christine Oates, tax partner at Ernst & Young in Birmingham.

When an industrial building is sold the remaining value of the structure that has not been claimed as an allowance can be claimed as a 'balancing adjustment'. This was stopped in the last Budget and the annual allowance will now be phased out.

"The most important change of the IBA rules is that no balancing allowance can be claimed if qualifying structures are sold after March 21 2007. Equally no balancing charge will arise on a sale," said Ms Oates.

"IBA has been a staple of the tax system for more than 60 years and its loss will be crippling for many of the region's manufacturers who have taken it into account when making investment decisions."

"It seems the Treasury wants to introduce the changes because funds must be found to finance the tax rate reduction for companies to 28 per cent, although alterations to capital allowances more than compensates, with estimated additional revenue to government coffers of £1.1 billion in 2008/09.

"The government also believes relief should only be given for depreciating assets and claims that buildings don't depreciate - which is clearly not the case in every situation, particularly in the agricultural sector," added Ms Oates.

Overall, the abolition will cost UK businesses an estimated £11.5 billion in lost tax relief over 25 years, according to figures from Ernst & Young.

"I know of one large manufacturer that will lose approximately £1 million per year as a direct result of the abolition of IBAs," said Ms Oates.

"The changes also represent a substantial body-blow to large chemical manufacturers in the region and I am aware of one that faces an additional tax bill of some £500,000 per year.

"Additionally, pharmaceutical companies will be especially hard hit, not to mention the long-suffering farmer who has been repeatedly pummelled by all manner of economic adversity in recent years."

Ms Oates added: "This move has created a really bad impression among businesses, because the unexpected, retrospective nature of the change is seen as a dangerous precedent that could undermine the UK's reputation as a stable place for foreign direct investment."