This was always going to be a Budget for testing times. However, there had been very few announcements in the build up to provide an inkling as to which way the government would go: raise taxes now to start plugging gaps in the deficit; or hold back and provide stimulus to allow the economy to grow.
Manufacturers were waiting with bated breath for much needed support for a sector beleaguered by the COVID-19 pandemic and still getting to grips with the UK’s exit from Europe.
In the run up to the Budget, we launched our Manufacturing Tax Manifesto ‘Made in Britain’ calling for targeted tax support for UK manufacturers. Specific tax policies were formulated to act as a model for policymakers going forward. With an overarching aim to allow manufacturers to plan for the future and invest in the recovery, we highlighted six key requirements for the sector:
- Access to skilled workforces
- Access to finance for investments
- Reductions in the cost of manufacturing premises and assets
- Realising the benefits of clustering
- Incentives for entrepreneurs and owner managers
- Support for trading and moving goods globally post-Brexit.
Manufacturing is a major cog in the UK’s economic engine, employing 2.7 million people across the UK and generating £191bn of its total output. What’s more, manufacturing underpins other sectors, such as construction and services, and will be central in driving forward the Ten Point Plan for a Green Industrial Revolution announced by the government in November 2020.
Did the government listen to this vital sector and its supporters? We take a look at the headlines for manufacturers:
- Furlough scheme (Coronavirus Job Retention Scheme/CJRS) – The government’s furlough scheme will be extended to the end of September, with no change to existing terms through to June. From July employers will be asked to contribute 10% towards the cost of unworked hours, then 20% in August and September.
- Skills and training – The Budget was relatively light on helping people into work, whilst furlough schemes remain to protect employment. Two new UK wide schemes “Help to Grow Management” for business skills and “Help to Grow Digital” will allow small businesses to benefit from government subsidised training. There was also an announcement that employers in England who hire new apprentices between 1 April 2021 and 30 September 2021 will receive £3,000 per new hire. However, this is unlikely to move the needle for most manufacturers given the overall cost of hiring an apprentice can be up to £100,000. Therefore, the Government still needs to do more to help drive up skills and training in the sector.
- Corporation tax rate – as trailed in the weeks leading up to the budget there was an increase announced, with the main rate going up to 25% from April 2023. To help SME manufacturers though there will be a return to the small profits rate, with companies below £50,000 of taxable profits still paying at the 19% rate and a tapered rate up to £250,000. This is a controversial step, and is likely to raise concerns from international businesses as to the competiveness of the UK tax regime as we set out in our manifesto, and so the Chancellor will hope that this is offset by the super deduction and AIA announcements in respect of capital investment. As always there will be winners and losers from these competing measures, and so time will tell if the Chancellor has struck the right balance.
- Annual Investment Allowance (AIA) – The AIA will to be kept at £1m until the end of 2021. Whilst a welcome boost for investment, as noted in our Manufacturing Manifesto, the AIA needs to be used to provide more long term certainty to manufacturers for example by extending the £1m limit for the rest of this Government (i.e. until 2024).
- Super deduction for investment – Perhaps the most eye-catching announcement for manufacturers was the super deduction to encourage investment over the next two years. Plant and machinery items qualifying for the main rate pool will have a super deduction of 130% of the expenditure. Special rate pool qualifying items will receive a first year allowance of 50%. Alongside the changes to the AIA, this aligns with our Manufacturing Manifesto which argued for similar measures to reduce the cost of capital. While this should encourage manufacturers to give the green light to upcoming investment plans, particularly those large scale projects above the AIA of £1m per year, we still would like to see the Government think long term, rather than only incentivising investment in the next two years.
- Extended loss carry back – For companies (and unincorporated businesses) hit hard recently, there will be an extension to existing loss carry back rules. This will allow up to £2m of losses in each of 2020/21 and 2021/22 to be carried back 3 years, subject to group cap rules. This will give many businesses that were previously profitable a cash injection in the short term. For those returning to profitability they may hold fire and wait until the CT rate increases (and therefore the value of losses does too) and carry the losses forward.
- R&D tax relief – the government announced that it will carry out a review of R&D tax reliefs aimed at ensuring the UK remains a competitive location for research and ultimately investment in R&D activity. The government will also consider bringing data and cloud computing costs into the scope of relief which will help fuel the digital transformation manufacturers need to compete in the ‘Fourth Industrial Revolution’. In our Manufacturing Manifesto we suggested updating the UK R&D regime to ensure it is competitive and incentivised businesses to invest in the UK. Therefore, this is review is welcome, and we hope the government considers the ideas we outlined in our Manufacturing Manifesto.
- National Minimum Wage (NMW) - The National Living Wage will increase from £8.72 per hour for over-25s to £8.91 per hour, an annual pay rise of almost £350 for someone working full time on the National Living Wage. This is a welcome increase. A concession for employers NIC on the rise in NMW (as highlighted in our Manufacturing Manifesto) would have eased the burden on employers though.
- Freeports – There will be 8 new freeports across the country which will allow businesses an enhanced 10% rate of Structures and Buildings Allowance (usually 3%); an enhanced 100% first year allowance for qualifying plant and machinery; full relief from SDLT; and full Business Rates relief. There will also be benefits in streamlined planning processes and simplified customs procedures. Our Manufacturing Manifesto explored the benefits of clustering and the creation of freeports should be a welcome boost to manufacturers in those areas.
- Food and Drink sector – a freeze in alcohol duty should be a boost for the sector as it looks to recover from COVID-19 restrictions.
- Fuel duty – remains frozen which will help manufacturers manage the cost of transporting goods in the short term. In the longer term, we would like to see strategic management of fuel duty alongside potential new levies on EVs to encourage a shift to greener technologies whilst managing Treasury revenues.
This was a mixed budget for business, manufacturers included, with a clear focus on the short term. While there was a boost for capital investment over the next two years, this will be offset with higher corporation tax rates from 2023. Whether this will affect capex decisions in the sector remains to be seen.
Manufacturers need a targeted, long term tax policy to stimulate growth and investment as we set out in our Manufacturing Tax Manifesto.
For many manufacturers there will still be long term issues to resolve and plan for, such as how to attract and retain a highly skilled workforce. The green agenda was also conspicuous by its absence despite previous government announcements making it a central part of businesses’ future plans (and a key thread throughout our Manufacturing Tax Manifesto). With COVID-19 restrictions set to end in June, and CJRS in September, we may well see a return to the despatch box for the Chancellor with an autumn Budget once the road to recovery becomes clearer. We will continue to make the case for manufacturers who need longer term visibility to power the recovery.
Read our full Budget commentary