I got out to another couple of companies last week to chat about tax. I'm working on the link between our tax system and investment - how we can improve policy to drive higher investment.
The first company, a pre-revenue R&D intensive firm mainly wanted to talk about finance. The state of finance for highly innovative companies in the UK isn’t what it needs to be to drive a rebalanced economy.
The main problem seems to be access to late-stage venture capital. This is a problem in a lot of countries, not just the UK – but the supply of this kind of finance, the patience of investors, and the willingness to take a risk were all seen as healthier on the other side of the Atlantic and possibly in Israel.
As far as tax went, this company was unsurprisingly a big supporter of R&D tax credits and praised the government’s extension to the generosity of the SME scheme. But they also thought the credits cut out far too early in the innovation process.
This company isn’t selling anything yet – but is working through all the process problems of manufacturing a proven concept at scale and at an economic cost. Clearly this is innovation – but the R&D tax credit is not available to support this process.
The other company I saw last week was a large multinational manufacturing in many countries around the world including the UK.
This company gave a reality check on how influential tax was in influencing company investment decisions.
While the government’s bold cuts to the headline rate of corporation tax were attention-grabbing for the company, they are still not powerful enough to overcome the factors driving where the company might put its next factory, which primarily related to where demand in the world is growing.
Where the corporate tax rate is relevant in developed markets is in influencing decisions about where the company retains capacity.
Another issue that I found illuminating was this company’s compliance issues. In my own naivety I had thought that tax compliance was a real issue for smaller companies that might have a finance director and nobody else to manage all tax and finance matters – but that a big company would not see this as anywhere near a problem to the same extent.
But what I was told last week was that compliance is a problem for big companies. Even a large multinational with a dedicated tax team will likely still use outside consultants for example to claim for R&D tax credits.
And keeping up with changes to the tax code is a constant challenge.
As far as solutions to this complexity went, one idea we discussed related to both R&D tax credits and capital allowances.
Rather than creating complex tax-specific regimes administered by the HMRC, why can’t we have R&D claims and capital allowances audited as per standard accounting practice?
In the case of capital allowances this could remove the need for the capital allowance regime altogether – replacing it with an expense on the P&L that reflects the economic reality for the plant and machinery in question.
Good ideas worth exploring further…