It’s that time of the year again when EEF gears up for the Autumn Statement. So far we’ve blogged on three of the four key pillars of our Industrial Strategy approach. Today we complete the quartet by looking at the fourth pillar – lowering the cost of doing business.
Key ask: Remove plant and machinery from the business rates system
The tax system is a key way through which governments incentivise businesses to spend more – on both capital and labour. It’s also an important way to attract new businesses to set up shop in the UK. Overall, the UK doesn’t do badly on that front; the WEF 2016 global competitiveness report puts the UK 23rd on the effect of taxation on incentives to invest. While not exactly stellar, the UK is the top G7 country on that list.
However, there is one historical quirk in the tax system that’s proving to be a significant bottleneck on capital investment – the inclusion of plant and machinery in the business rates system. Put simply, if a manufacturer invests in a new blast furnace, that will increase the perceived value of the property and therefore the tax on that property through non-domestic rates aka business rates. In effect, that has transformed what’s supposed to be a tax on property to a tax on investment. So in that respect the tax system acts as a significant disincentive for investments aimed at improving productivity.
There’s a simple solution to this; remove plant and machinery from business rates valuations. This is something EEF has been calling for repeatedly over the past few years.
Why is this important?
The UK’s productivity shortfall against our key international competitors has been well documented in the press and academic literature. Earlier in the year, EEF devoted a whole report to it and the previous government placed improving productivity at the top of its policy agenda.
The inclusion of plant and machinery in the business rates system is a significant obstacle to closing this productivity gap. This is further aggravated by the fact that it’s out of sync with international best practice. None of our key competitors include plant and machinery as part of property taxation. With the cost of doing business a key part of manufacturers’ production location decisions this puts the UK in a disadvantage.
And then there is Brexit; the hefty depreciation in the pound is a boon to exporters but adds significant upward pressure on manufacturers input costs. What’s more, the impact of uncertainty on private sector investment is one of the top concerns on policy-makers’ minds at the moment.
Three benefits in the price of one
- Incentivising investment: Removing plant and machinery from business rates would provide a considerable boost to businesses investment. An EEF survey earlier this year showed that 42% of manufacturers would step up investment if plant and machinery was removed from the business rates system. Crucially, during the March 2016 Budget, the Office for Budget Responsibility hinted that the removal of plant and machinery would boost business investment by 0.5% throughout the forecast period. Regrettably, it was dropped at the last minute.
- Boosting productivity: Removing a bottleneck for capital investment should help drive productivity growth; it reduces the effective cost of capital and provides more certainty over returns to investment. The dearth of capital investment has been identified by the Bank of England as a key reason for the UK’s productivity shortfall.
- International competitiveness: Taking out plant and machinery from business rates would align our property tax system with those of our key competitors. With UK manufacturers facing one of the highest energy cost burdens in the OECD, we don’t need another reason keep investment out of the country. We need to ensure that the UK remains a competitive location for an industry as mobile as manufacturing.
Wrapping it up
If you’re still not convinced I’ll make a final pitch. Given the current environment of post-Brexit uncertainty, is there any government that would put a policy in place that that adds to businesses’ already ballooning costs, disincentivises productivity-enhancing investment and makes the UK a less attractive location for manufacturing?
We think not. Hopefully the Government will take up this message after several missed opportunities.