What we want to see from the Autumn Budget 2017

For the Autumn Budget 2017, Ayming’s experts offer their opinions on key topics such as Brexit, R&D Tax & Grants, Construction, Industrial Strategy and the NHS.

On Wednesday, the UK Chancellor of the Exchequer will present the Autumn Budget 2017 to Parliament. With the Government laying out its spending priorities and Brexit at the forefront of people’s minds, but there are lots of issues in play and the detail will be watched closely by all sectors.

Here’s what we’ll be looking for:

Brexit:

With talks in stalemate and rumours circling regarding the Prime Minister’s authority, the Government has a responsibility to instil confidence in British businesses across all sectors. Manufacturing businesses need to know if they can keep exporting, UK airlines could end up grounded and supply chain issues are becoming more and more real. There is now an increasingly likely possibility of the introduction of tariffs to UK goods and services which could throw some businesses into the red.

More than anything, businesses need security. Recent GDP figures clearly indicate investments are being put on hold. Some of our private equity clients are showing real concern over the extent to which things have slowed down.

If the Autumn Budget 2017 goes the way that is expected – limited change while Brexit negotiations are in flux – the Chancellor is putting our economy at risk.

NHS Funding:

There is no doubt that NHS funding and staff pay rises will be high on the agenda for the Government.

But if the Chancellor really wants to tackle the healthcare crisis in the UK then he should also look beyond funding. Hammond needs to empower hospitals to roll-out their Sustainability and Transformation Plans (STPs), leading to leaner and more efficient operations. In this context, more and more NHS Trusts are looking at organisational efficiencies as well as procurement and supply chain improvements as methods of minimising outgoings and releasing cash to improve patient care. It’s these kinds of activities that should be not only promoted but also incentivised.

If money isn’t available to pump into the NHS, then hospitals need to get better at not losing it – and additional guidance and empowerment is needed to establish these new processes.

R&D Tax and Grants:

The UK is going through a productivity slump. Even manufacturers, who have newfound competitive advantages brought on by the weak pound, have also seen a fall in output. The UK is not competing on the world stage and the Government must act to put us on a better footing before Brexit is completed.

One area that needs urgent attention is the R&D tax framework. UK SMEs’ net benefit from R&D tax incentives is in the region of 26-33%. In contrast, large companies receive just under 9%. This issue was highlighted by Alibaba’s recent announcement that it will invest $15bn over three years in a global research programme. The UK is not one of the locations they have chosen. With Brexit on the horizon, we need to do more to incentivise big companies to come to, or stay in, the UK and invest in R&D.

Today’s R&D tax legislation is based on thinking from a bygone era. Drawn up in the 1960s, it was focused on academia and blue-sky science; or geared towards pharmaceutical firms innovating with new drugs and delivery systems. When it was introduced, innovation was restricted to white coats in university labs. But that’s no longer the case. HMRC needs to evolve at the same pace as the businesses it deals with.

On top of this, HMRC has disputed £425m in R&D credits over the last year, up from £90m in the previous 12 months. The process is clearly becoming too stringent and HMRC case workers are challenging every detail of applications.

Globally, the UK has a low level of R&D spending as percentage of GDP. Data from OECD shows UK R&D as a percentage of GDP sitting at 1.7% in 2015, lagging behind countries such as Germany (2.9%), Japan (3.3%) and the US (2.8%). This must change to support what the Government itself has advocated: R&D spend to be 3% of GDP by 2020.

We need actions to match words, a review of, and then clarity and consistency on definitions of innovation, as well as the way they are interpreted and handled to ensure we can fulfil our potential as a nation.

Construction and Infrastructure:

Despite promises to “Get Britain Building”, the UK construction industry has descended into a slump. Recent GDP figures from the ONS show the construction industry is in a recession. Brexit is beginning to take its toll and investments are being put on hold. Construction companies will undoubtedly be looking to Philip Hammond’s Autumn Budget 2017 for further support to offset this uncertainty. It’s likely the Chancellor will maintain investment in both infrastructure and housing projects. Continuing to encourage house building will provide a crucial boost to the construction industry whilst improving the ever-worsening housing crisis.

Investment alone is not enough. It needs to create bespoke infrastructure grants and incentives and, most importantly, remove the hurdles that companies currently face when pursuing the R&D tax incentive. This is yet another example of words not being matched by actions as the HMRC drags its heels when it comes to approving a large percentage of R&D tax claims from the construction sector.

As it stands, the Government is not encouraging the industry to innovate or to take on the new and exciting projects, which are critical to its future. It can no longer promote construction loudly while quietly delaying or obstructing vital funding.

Digital Economy and Innovation:

The Government has repeatedly stated its determination to keep the UK at the forefront of tech and digital innovation. This year alone we’ve seen the launch of the Digital Strategy in March and the new Digital Economy Council in July, both with the fundamental aim of boosting innovation and ensuring the UK remains the most attractive place to start and run a digital business.

Now’s the time for the Government to prove there’s bite behind its bark. It needs to take control of its own initiatives, create industry-specific incentives and clarify what post-Brexit funding will look like.

In order to make the UK attractive, the Government should be investing in infrastructure, such as fibre optics and 5G networks, as well as providing funding for WiFi networks in public areas. On top of this, providing specialised support for tech and telecom companies will help keep the digital momentum flowing and make our cities into globally accredited smart cities.

Industrial Strategy:

Industrial strategy will be hot on the agenda this year. The threat of a downturn in our financial services industry has highlighted some cold truths about the UK’s dependence on the sector. Indeed, positive efforts to rebalance the economy have been made with around 4.7 billion in investments over the last five years. A good start, but more has to be done.

The need to boost exports should make manufacturing a priority. The Government will be required to step in where necessary and provide security to existing manufacturers, as seen by recent developments with plane manufacturer Bombardier.

On top of this, funding should be provided for the sectors in which the UK has potential to thrive such as science, technology, engineering and manufacturing. There is also a clear disparity between the level of academics in the UK for these sectors and their contribution to economic growth. Making certain sectors more attractive to young job seekers by investing in apprenticeship schemes and developing trade skills will help these industries thrive and diversify the economy.

Innovation Funding:

This October, the European Commission’s website made it clear that UK applicants will no longer be given access to funding from the Horizon 2020 once the UK leaves the EU. And importantly, funding will be pulled out from current projects across the UK.

The knock-on effects of this are severe. Horizon 2020 is crucial to a huge number of scientific and technology based research projects in the UK, ranging from personalised medicine and big data to environment and climate change projects.

If the Government does not push on constructively with negotiations and begin determining a deal, whether that be a transitional arrangement or a clearly defined agreement, hundreds of research projects risk losing their funding on June 19th 2019.

Not only does this jeopardise funding for UK-led projects but, without a predetermined agreement, it will also push UK participants out of wider European projects. Once again, this will send immediate shockwaves of risk and uncertainty to UK research and technology organisations, and indeed to our European partners who regularly integrate UK participants into their research projects.

The Government must give these projects more security by providing guarantees and taking steps to ensure funding will not be withdrawn. Hammond also needs to look at ways to provide funding for projects that will no longer be able to receive Horizon 2020 funding.

Northern Powerhouse:

We’ve heard plenty of positive announcements regarding the Northern Powerhouse in recent months, not least the announcement of an additional £300m for rail improvements in the north. Although welcome, these investments fail to address some of the key issues around the economic divide between ‘The North’ and ‘The South’.

It’s time to address issues beyond infrastructure. The main concern is the brain drain – a direct pipeline of talent and inspiration trickles from the North to the South. Graduates complete their studies then make the move to London. Start-ups form in the North but end up relocating to the capital. It’s an unhealthy situation, drawing entrepreneurs and their funding away from the region.

What’s needed is an environment that not only fosters, but directly rewards and encourages innovative businesses. As much as the North needs railways, it also needs small businesses that can flourish, grow and succeed outside of London. And as much as it needs conference centres, it also needs a business backdrop that can attract investment from the likes of Google.

In order to foster talent, more funding and support is needed for apprenticeship schemes based in the north. Through bursaries and grants such as these, the UK would stabilise this exodus and help the North harbour its talent. Then, in order to retain businesses and encourage innovation, the Government should look to establish Specialised Economic Zones (SEZs). These target businesses of specific industries to remain in a specific area and reward them through tax incentives.

Electric Vehicles:

UK car manufacturers need more incentives to remain in the UK. This year has seen a flurry of countries (not least the UK) declare their intentions to remove non-electric vehicles from the roads, however, with electric vehicles only half as profitable as equivalent vehicles with combustion engines, car manufacturers will be anticipating tough times ahead.

Electric vehicles are struggling to meet consumer expectations. UK car manufacturers like Nissan and Jaguar Land Rover are going to have to significantly develop and improve on their current offerings in order to produce vehicles that don’t just tick the box of being an electric vehicle, but offer consumers the performance that they now consider the norm (not having to charge every 120m) and more importantly at a price point the average person can afford.

While these companies will be able to claim R&D tax relief on these activities at just under 9p for every £1 spent, the government does need to do more. Whilst I wouldn’t expect a blanket increase in R&D rates, although this would be welcomed by the industry, I would expect to see further investment in infrastructure, including charging points for electric vehicles, as well as specific tax breaks or incentives for companies in the sector as a minimum.

The added uncertainty of Brexit heightens the need for the Government to support car manufacturers. We already have higher R&D tax rates for ring fenced activities in the Oil & Gas sector; I would like to see Phillip Hammond develop this notion to activities related to the development and performance of electric batteries.

If the government does not do something significant in this budget to show the industry that they are committed in assisting them in meeting their target by 2040 then we may well see manufacturing plants shut down and thousands of jobs lost, as these companies lead an exodus to those jurisdictions that are willing to support and reward development in this field.

VAT:

Rising VAT receipts mean the Government could beat its borrowing forecasts for the year, handing Chancellor Philip Hammond vital ‘wiggle room’. For this reason, the flat rate of VAT is unlikely to change. However, the threshold for partial exemption currently stands at £625 per month or £7,500 per year. This has not changed for 17 years. It is time to rethink this policy to help smaller businesses.

RDAs:

The legislation for R&D capital allowances (RDAs) has been around since 2000 and is long overdue an overhaul. Capital Allowances are currently seldom used where most companies write off their total capital expenditure under the AIA threshold of £200,000 without the need of claiming RDAs, with the exception of specific assets like vehicles and buildings. If they are loss making there is little point in making a claim unless there is a realistic opportunity of offsetting the additional losses against profits in the future.

The RDA scheme only benefits profit making companies as there is no cash credit facility built into the regime. Unlike the R&D revenue schemes (SME and RDEC) where companies receive a cash benefit whether they are loss making or profit making through either a cash credit or tax reduction, the RDA scheme only benefits profit making companies. The extension of the RDA scheme to a cash credit for loss making companies (as currently exists for Enhanced Capital Allowances at 19%) would help both start-ups and more established businesses.

For start-ups, which are unlikely to make a profit for their first years of trading, it would greatly help them surviving those tumultuous initial years. For more established businesses being able to continue their investment it would be a strong a message that our capital regime is as globally competitive as our revenue scheme has claimed to be. The mechanism is already in place for R&D Tax Relief and ECAs, and now is the time that the two are married and the industry would welcome the extension of this facility to RDAs in this month’s budget.

Autumn Budget 2017 Live

What will Autumn Budget 2017 mean for UK businesses? Our experts will be on hand sharing the highlights for UK business and their opinions live on our Twitter page.

Stay tuned for more commentary or drop us a line to discuss further.

For Press contact Nick Tribe, Head of Marketing, contactuk@ayming.com +44 20 30 58 58 00

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