Budget: What should Rishi Sunak prioritise to boost UK manufacturing?
Government borrowing has now exceeded £270bn in this financial year, according to the Office for National Statistics. While under normal circumstances, this may have raised some eyebrows, we are still operating in unprecedented times. Despite the significant COVID-19 relief bill, further investment stimulus is required, and the UK manufacturing sector will be hoping this is reflected in tomorrow’s Budget announcement.
An effective pro-manufacturing tax policy is needed not only to sustain the economy and help support employment in the sector, but to position the UK for long-term growth. A healthy and growing manufacturing industry could be the foundation for post-pandemic recovery, and a key strategy for the post-Brexit world. More widely, this would bring job creation throughout the supply chain and skilled labour investment.
The industry needs government support to achieve this, including measures that make it more attractive for overseas businesses to invest in the UK and increase the UK’s share of manufacturing projects. While EY’s UK Attractiveness Survey 2020 found that the UK has successfully increased its share of manufacturing projects in a declining European market, the failure to spread the benefits of FDI beyond the larger urban centres is the primary reason for the country’s unbalanced geographic outturn.
What do we expect from the Budget?
In the Government’s manifesto, it stated it will not increase income tax, VAT or national insurance, but these pledges were made a year prior to the global COVID-19 pandemic. Under the very different circumstances today, there is a chance that this position could be reconsidered.
The Treasury has said that the Budget will set out its next phase of protecting jobs. This may involve extending the Coronavirus Jobs Retention Scheme for the fourth time, but there is debate over whether the Government should consider measures that would help boost business instead.
We expect to hear announcements in the Budget on the promised Freeports – enterprise hubs where different customs rules would apply. This may be accompanied by new enterprise zones (EZAs) targeted outside the South East.
There may also be new announcements on research and development (R&D) incentives, in line with the consultation that closed in October 2020, and possible temporary increases in capital allowances and entrepreneurship grants.
In order to generate tax repayments, we may see a revision to the policy on carrying losses from the previous year – this could be increased to up to three years.
What else does UK manufacturing need?
While the manufacturing industry would welcome all the above measures, it is also hoping to see specific reliefs for sectors which are particularly feeling the impact of Brexit and COVID-19. This includes UK automotive manufacturing, a key industry with a turnover of £78.9bn and which added £15.3bn in value to the UK economy in 2019, according to figures from the Society of Motor Manufacturers & Traders.
R&D tax incentives could be widened. Although HMRC analysis shows UK manufacturing already has the greatest proportion of claims, this disguises an uneven distribution within the industry. Knowledge of what qualifies for both the large business RDEC regime and the SME regime is not always well understood. A white coat is not always required! HMRC needs to do more to ensure all areas of UK manufacturing understand their entitlements.
The UK patent box regime could be broadened, boosting its competitiveness against other regimes such as the Knowledge Development Box in Ireland.
The enterprise zone incentive of 100% capital allowances is currently limited to expenditure on plant and machinery in small, tightly defined area. A natural progression could be the targeting of additional allowances, such as an industrial buildings allowance for manufacturers based in certain ‘manufacturing zones’.
The Government could also consider a temporary reduced rate of VAT for end-produce, similar to what we have seen in the hospitality sector. This could be viable particularly in the automotive sector.
Finally, relief for genuine business expenditure and investment needs to be increased, not eroded. The sector needs certainty and stability in the tax base.
Beyond the Budget
Businesses should pay close attention to this much anticipated Spring Budget, which will hopefully bring some measures to support UK manufacturing. We also could be in for a few surprises.
But with Budget unlikely to provide all the answers, trade body representation and continued sector engagement with the Government may be needed for longer term support.
New announcements aside, not all businesses are aware of the support that is already available, particularly grants and incentives, and how they can access it. For example, there may still be an opportunity to revisit or top-up R&D tax claims and apply for various government schemes, such as the ‘Industrial Energy Transformation Fund’ and ‘Manufacturing Made Smarter’ challenge programme.
For analysis of the Budget, register for EY’s Budget webcast on 4 March at 3pm.