One of the most eye-catching measures in Rishi Sunak’s latest Budget was the introduction of the “super deduction” regime which will allow businesses to offset 130% of investment spending on plant and machinery against profits for the next two years. So, spend £10m on new equipment and firms reduce taxable income by £13m.
This is a smart move to encourage spending and, anecdotally, looks to be having a positive effect. However, I would argue that it is time for Rishi Sunak to take a further bold step and make a move that would benefit one of the UK’s great successful export stories, namely the creative industries, by also extending this tax break to creative advertising.
What would be the logic for this? In my recent report on the UK advertising market, Pause or Play, I pointed out that the correct way to look at advertising and marketing spending is to consider it as “intangible capex”.
As firms invest in physical plant to boost sales, so they invest in brand and marketing to do the same. Moreover, just as physical capex is an investment that boosts a company’s overall value, advertising and marketing spend does the same by boosting the value of the brands.
This is recognised implicitly under accounting standards; in the Balance Sheet, line items such as Goodwill reflect this. Unilever has nearly £35bn of goodwill and intangible assets while Procter & Gamble has nearly $24bn on its Balance Sheet, explicitly for ‘Trademarks and Other Intangible Assets’.
More importantly, it would have both real tangible benefits for the creative industries and the UK in general. Firstly, it would boost the UK’s creative industries – which provides both significant numbers of jobs and tax revenues – by boosting advertising spending. The Creative Industries Federation estimates, prior to the pandemic, the Creative Industries sector contributed £115.9bn in Gross Value Added (GVA) to the UK economy, more than the automotive, aerospace, life sciences and oil and gas industries combined.
A significant proportion of this works in areas dependent on advertising, such as agencies and the commercial television space, or reliant on the benefits of advertising spending, for example television production (the UK television production sector brought in £1.25bn of international sales in 2019. While part of this relates to the BBC, a significant proportion is effectively funded via commercial broadcasters such as ITV and Sky.
Secondly, it would help the Government solve several potential thorny issues within the media without resorting to complex measures. For example, in the television space, such a move should help boost the fortunes of Channel 4, which has faced significant financial issues.
Perhaps the area where it would help the most, though, is the area of regional newspapers, which are often vital to local communities but which have suffered as advertising revenues have flowed to the online giants creating a vicious circle (more on this in a moment) of closing newspapers and reduced resources. For that reason, it might be worthwhile considering a supercharged version of the plan whereby advertising in local publishers (both their print and online versions) received a higher relief rate, possibly as high as 200% (another benefit of this is that it would give a disproportionate benefit to small and medium businesses who are local newspapers’ natural target market).
Thirdly, such measures would help both the UK Treasury and the whole economy. In fact, it could be argued that the relief has wider positive effects than the tax break on infrastructure. That is because of the ripple effects and the effect on consumers. The reason advertisers advertise is to persuade consumers to spend on their products. By encouraging advertising spending, a positive flow through effect would be generated whereby consumers would be encouraged to spend more which would stimulate the economy and bring in extra revenues from VAT and other sources (the Government would also benefit from the VAT on advertising spending itself and the extra corporation taxes paid by firms).
What about the counter arguments?
One would be that this scheme would end up benefiting the major global tech giants such as Google and Facebook that dominate UK advertising (two thirds of UK advertising spending in 2019 was digital according to AA / WARC although that includes the digital revenues of ‘traditional’ media firms).
I would argue there are several ways to deal with this. One would be to block the relief being applied to advertising on any platform that does not a minimal tax rate, e.g. 10% or 15%, on its UK revenues. An advantage of this approach also would be it should help to deal with the thorny issue of how to tax the global tech companies, which has caused tension between the UK and the US as the scheme should incentivise spending going towards those platforms that do pay their taxes, rather than impose a discriminatory tax rate. Another variation would be to bar Search specifically from the scheme as it is not a brand-building tool. This would be of particular benefit to the regional publishers who should see significant gains in share amongst SMEs (of course, there is nothing to stop the two of these measures combined to be applied).
What about the cost? It is probably less than imagined even if only one includes the gross costs and does not take into the account the benefits outlined above. I forecast that 2021 UK advertising spending will be £27.1bn.
However, excluding Search, that figure is £18.6bn. Advertising spending is already deductible for corporation tax purposes’ so the extra deductible against profits is 30%, or £5.6bn (regional newspaper advertising is now only 2% of UK advertising spending so the extra deductible for that area would have minimal impact). Corporation tax is moving upwards to 25% but even at this rate, the cost to the Treasury would be £1.4bn per annum and, again, that is excluding the effect of extra VAT receipts and tax revenues brought in by the measures.
Given that, it is time for the UK Government to make the leap and do something that is good for Media and for the economy. Over to Rishi Sunak.