A Budget to underpin growth

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Next week, the Chancellor will make his final Budget Statement of this Parliament. We are calling on the Chancellor to use this opportunity to underpin growth in manufacturing sectors, with measures to sustain the economic recovery.

Our six key recommendations are:

1. Bring forward the EII compensation package
2. Minimise uncertainty arising from the business rates review
3. Review capital allowances
4. Improve access to R&D tax credits
5. Boost support for exporters
6. Back employers’ control of apprenticeship funding through a voucher system

And here is the detail:

Recommendation one: bring forward the EII compensation package

The UK steel sector plays a key role in manufacturing supply chains but has recently suffered from a strong Sterling and weak demand in Europe and slowdown in China. UK steel manufacturers’ ability to compete has – at the same time – been hampered by higher unilateral costs, including energy.

This government has taken significant steps towards addressing some of these unilateral costs but in 2015, UK steel producers will be paying more in levies and other charges than ever before. In particular, indirect costs – passed through electricity bills for decarbonising the electricity sector – could add £37/MWh (2012 prices) by 2020. This will equate to roughly one third of the total electricity price, and is significantly more than for elsewhere in Europe.

To address this, the government introduced a compensation scheme for Energy Intensive Industries (EIIs). Once all elements of the scheme are introduced, this should reduce the impact of pass-through costs by up to 85% for those organisation that qualify. However, compensation relating to the Renewables Obligation and Feed in Tariffs (which together account for the largest costs of climate change policy) is not due to begin until April 2016. The urgency of the situation requires action before this date. Government should commence payments as soon as possible after state aid approval is achieved from the EU.

(For further detail on this, see Richard’s blog from last week).

Recommendation two: minimise uncertainty arising from Business Rates review

Manufacturers do not support a fundamental overhaul of the business rates system as it could create instability and uncertainty around future tax rates in the UK. Any uncertainty around the structural review should of Business Rates should therefore be minimised as quickly as possible, and the government has rightly set out a deadline for Budget 2016.

In addition, in the forthcoming terms of reference, the government should clearly outline what will be within the scope of the review, and the milestones at which key decisions will be taken. Tax should continue to be calculated using individual property valuations and the uniform business rates should be set at national level. These areas should remain out of scope of the review.

Recommendation three: review of capital allowances

Capital allowances incentivise investment by allowing companies to deduct depreciation costs from taxable profits. If the allowances precisely reflect the loss in the value of equipment, they will fully reflect the present value of depreciation costs to a firms.

However emerging findings from research we have done in partnership with ADS, and MTA shows that the average life of machinery and equipment has fallen. This suggests that the rate of depreciation of equipment has increased in the last few decades, however, the UK’s main writing down allowance has moved in the opposite direction. At the same time, frequent changes to the system have added complexity and confusion.

This element of the tax system is in need of reform. A thorough analysis of the UK capital allowance regime should commence as soon as possible with a view to develop a more stable system by 2016. In the meantime, the Annual Investment Allowance should be sustained at its current level.

Recommendation four: improve access to R&D tax credits

The R&D tax credit is a key pillar of the innovation support system, helping manufacturers to invest more in innovation than they would otherwise be able to do. The consultation by HMT and HMRC into improving access for small business therefore offers an opportunity to boost innovation and competitiveness.

The R&D tax credit can be complicated to claim so steps to improve design, understanding and administration are all appropriate. In particular, manufacturers highlight the need for a stable regime, with any changes clearly and consistently communicated. More guidance specifically tailored to companies would help to improve understanding, while a system of advance assurances could ease the process for first-time users of the credit.

Recommendation five: boost support for exporters

Growing exports will be key to improving the UK’s balance of trade, and is a key component of better balanced growth. However, the UK’s export performance has been sluggish for several years.

Boosting exports requires a breadth of policy support, recognising that exporting is complex. Exporters will face different barriers depending on their size, strategies, market and experience. Support from UKTI and UKEF is valuable, but awareness of specific schemes can sometimes be low.
Stability is key to boosting awareness, and a predictable, stable support environment for exporting needs a predictable stable funding stream.

In addition, to combat recent sluggish export performance, the UK needs to ensure our exporters are moving successfully into a diverse range of export markets. Our annual Executive Survey shows that manufacturers are working on new product and service offerings and developing new branding and marketing activities this year. Such activity could provide a springboard for export-ready companies to expand into more overseas markets. UKTI already provides support for branding and marketing activities, but given companies’ increased focus in this area, now is an opportune time to boost this support to help manufacturers expand into new markets.

Recommendation six: back employers’ control of apprenticeship funding through a voucher system

EEF has long called for a demand-led system of apprenticeship funding, which gives employers greater purchasing power. While the government has committed to this, the mechanism has not yet been determined. Government has sought views on a variety of models including using PAYE, an Apprenticeship Credit Model and a Direct Payment Model. None of these models have gained consensus amongst EEF members.

To best serve companies of all sizes, government should pursue a voucher model for delivering this, which – if developed correctly – could provide employer choice and would not present cashflow problems to business.

In order to ensure this system works, employers would need transparency about the value and eligibility of the vouchers, as well as the cost of training. The voucher must not create significant administrative burden or involve employers in the payment mechanism between government and providers.

(For further information on our skills policy recommendations, see Verity’s blog from last week).

Author

This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

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