How the chancellor could unleash the potential of manufacturing exporters
WITH A general election approaching, I am not expecting the chancellor’s Budget on 19 March to raise many eyebrows. All political parties are likely to keep the potential vote winners in reserve for their manifestos and the campaign itself. There may be moves to address the cost of living pressures many UK voters still face – by increasing the nil rate personal allowance band to £10,500, for example, or reducing the current 40 per cent higher rate of income tax by 1p.
With the economy now showing real signs of growth, however, the government should not miss this chance to put the right framework in place for businesses to make the most of the recovery. Any delay risks losing out to other world economies, which are also starting to emerge from recession.
UK tax policy over the last decade has largely ignored the UK’s mid-sized businesses, despite the fact that they are widely considered to be the section of our economy that can drive forward a meaningful and sustainable recovery. We should also not forget that the mid-sized businesses of today, if correctly nurtured, could become the big businesses of tomorrow. As such, I would like to see the chancellor provide real incentives to give UK business leaders the confidence and support to grow, by encouraging investment in people and capital assets. This will help them develop not only existing markets, but also encourage them to start – or further develop – exporting.
Until recently, the UK had a tax allowance for expenditure on factories. By reintroducing this allowance, companies would be encouraged to invest in new factories or in extending or improving existing ones. This would lead to increased production capacity to meet demand at home, but also for export. When compared to some other European states, most notably Germany and France, the UK is currently at a competitive disadvantage as these countries do provide such tax breaks.
More should also be done to encourage businesses to take on more people to help drive growth. Employers’ national insurance (NI) currently acts as a barrier to such expansion and, although the government has sought to tinker with NI reliefs in the last two Budgets, the impact of these measures is proving to be negligible. What is needed is a bold move that will affect real change. A temporary reduction in employers’ NI contributions for the manufacturing sector would help bolster employment and support the government’s rhetoric of doubling exports by 2020, by targeting those companies that are most likely to sell to foreign markets.
The initial reduction could be phased back up to current rates over, say, a five year period. Although the immediate direct cost to the Exchequer may be high, this would be more than offset by the increased income tax and employees’ national insurance on earnings generated by the newly-employed.
However hard it may seem, I would urge the government to balance election strategising with the implementation of practical measures to make the most of the recovery now. After all, a buoyant economy will benefit all of us.
Richard Rose is tax partner at BDO.
Paul Ormerod returns tomorrow.