Some thoughts on what people want out of the budget and what they expect we'll get...
Below is a selection of thoughts about the current state of UK business and what people from the manufacturing community want to see come out of next Wednesday’s budget (April 22).
Be sure to add your own thoughts in the box at the bottom of the page.
Dr Peter Wormald, site manager Paisley Site, Ciba (now part of BASF):
As a manufacturer that exports 85% of what we make, I would just emphasise how much our production site at Paisley is benefiting from the weak pound. I have attended breakfast business meetings hosted by the Bank of England where the views of a low pound have been mixed, with some in the audience expressing concern that it is too low and calling for action be taken to increase its valuation versus other core currencies. Our site at Paisley is benefiting significantly from the current valuation of sterling. It is helping us to avoid more drastic action such as redundancies and switching to a short working week – which feeds into the economy itself, as fewer job cuts and less impact on employees’ earnings means more money in circulation in the economy.
While I agree Government policy must avoid allowing the pound to fall further to a precariously low level, I am looking for a Budget and BoE policy that does not jeopardise a low but stable valuation of the pound during this recession. If they start to worry about inflation and raise rates before we emerge out of this recession, a stronger pound will negatively affect our business and that could have large knock-on effects on our employees which we have thus far successfully avoided. What is needed is careful, intelligent monetary policy to keep the UK competitive while avoiding the more severe consequences of any further currency weakening.
Andrew Churchill, MD of JJ Churchill Ltd, precision engineers:
Surviving recession will be painful but the medicine is well-known: cost reduction balanced with the need to retain skills is familiar and it is proven. I’m much more interested in what I think is a more substantial but somewhat more counterintuitive challenge, that’s actually surviving in the upturn.
Politically it’s going to be very difficult for the Government or the opposition to talk too much about surviving the upturn. But coming back to the UK as a high labour cost economy, if we look beyond the prerequisites of quality and delivery the only reason as a manufacturer that we remain in business is through process innovation and the cost reduction that that brings. This innovation is inseparably hitched to the rapid evolution in the machine tool field. Quite simply, if we fail now, either through having a lack of guts, lack of ability in terms of financial credit, lack of ability in terms of government incentive, if we fail to aggressively reinvest in capital equipment then what we are doing for the next couple of years is accepting an incremental but rapid erosion of our comparative advantage. In essence we’re going to be increasingly competing on cost of labour – this is a battle we know we can’t win.
What we need to see if we’re going to have this balanced economy are policies from the Government that encourage this reinvestment now in manufacturing, because a lot of these machine tools run a long lead time, they’re big ticket items, we’re not going to see the benefits from them until we’ve got them into our plants from the long lead and commissioned. If in a recession where we’re more reticent to reinvest anyway, the Government goes ahead and further cuts capital allowances, further increases the depreciation period over which equipment is written down, or reduces annual allowances, that will further reduce our willingness to reinvest. I’m saying that anything from the Government that negatively impacts on cashflow is going to increase that reticence to reinvest and from my perspective one of the largest considerations has to be the taxation treatment of capital equipment.
Part of the manufacturing strategy, as launched in the Government’s strategy paper at the end of last year, is they’re looking to reduce overall corporation tax by a point or two. And they intend to fund that reduction by a removal or reduction in these capital allowances. My point is that if you’re thinking about whether you should or shouldn’t reinvest in capital equipment now, you’re not thinking about the tax you’re going to pay on the profits you’ve made. You’re worried about the cashflow, it’s not about profits it’s about cashflow, and corporation tax has a modest and deferred impact on cashflow. Capital allowances has an immediate impact.
The impact of either enhancing capital allowances, which I would strongly advocate, or removing them, the impact of that won’t be felt immediately by the economy as a whole but it will mean that when the recovery comes and orders begin to be placed across the manufacturing sector, companies won’t have reinvested sufficiently so they’ll be looking for machine tools at the same time, lead times will push out, costs will inevitably go up but more to the point the opportunity will have passed – customers looking to place orders will look elsewhere and overseas will be the answer.
Maureen Penfold, head of the manufacturing group at accountancy firm Kingston Smith LLP:
Budget 2009: Between a rock and a hard place?
To what extent the Chancellor’s hands are tied when it comes to helping manufacturing?
Small companies’ rate
The tax rate on profits of up to £300,000 is currently 21% for 2009/10 after plans to increase the rate to 22% were shelved in the last Pre-Budget Report. There have been calls to reduce the rate to 20% or raise the threshold to £350,000, but this could prove costly for the Treasury as a large number of companies would benefit from the change.
Loss relief rules
In the last Pre-Budget Report the Chancellor announced an extension to the rules that allow struggling businesses to offset losses made in the current year against profits made in previous years when times were better.
Up to £50,000 of losses arising in accounting periods ending between 24 November 2008 and 23 November 2009 (which for most businesses will be a single year) can be set against total taxable profits for the preceding three years. Carry back of losses to the immediately preceding year remains unchanged and is uncapped. Extending the enhanced carry back rules for another year would be a low-cost option and a headline grabber. The Chancellor may even go a step further and lift the cap to, say, £100,000 or perhaps £150,000.
In order to stimulate commercial activity the Chancellor may encourage businesses to invest in capital assets by improving the tax relief on asset acquisitions. In the past, SMEs have enjoyed accelerated allowances on investment in plant and machinery. More recently, accelerated allowances have been targeted at assets with ‘green’ credentials. In practice however, the range of assets that qualify for generous ‘green’ reliefs is extremely limited. The Chancellor may broaden the base of ‘green’ assets qualifying for enhanced allowances and could increase the annual investment allowance from its current level of £50,000, perhaps for a limited period.
In his last Pre-Budget statement the Chancellor announced that the VAT rate would remain at 15% until 31 December 2009. Hiking up the VAT rate to 17.5% or more after this date would be political suicide. Instead, we may see the 15% rate extended for a longer period, but with the Government announcing a root and branch review of zero-rating reliefs for VAT to make up for some of this lost revenue. The review body would no doubt report its findings some time after the next general election.
For many companies the administrative cost and inconvenience of changing systems at such short notice following the last VAT rate change far outweighed any benefit. So it is with hope that any future changes are made with greater advance warning.
Employer National Insurance Contributions
In a vote-winning move the Chancellor may defer the 0.5% increase in Class 1 and Class 4 National Insurance Contributions, due to come into effect on April 2011, by a year. This would not amount to an enormous loss in revenue for the Treasury. Moreover, the delay would be seen as giving struggling businesses a helping hand.
Supply Chain Insurance Scheme
In an attempt to lessen the impact of dramatic reduction in credit insurance, the Chancellor is expected to announce an agreement with the insurance industry to share the burden of supply chain insurance. If the UK takes a route similar to that recently taken by the French government, we could see the state providing guarantees for businesses that cannot obtain cover elsewhere.
Despite the Chancellor’s recent announcement that the 5% increase in business rates, due to come into effect this year, will be spread over a number of years, many businesses will have already received rates bills that include the full 5% increase. This is because the legislation necessary to change the charging structure cannot be put in place before the summer. This change should bring some welcome relief once the necessary regulations are in place, but until then, businesses are being advised to pay the increased charges.
It is unlikely that any of the tax measures announced on 22 April will have businesses jumping for joy. Yet there is hope that the burden of tax liabilities will not get significantly worse – for the time being at least. Nevertheless, with the Chancellor’s plans for recovery reliant on spending, eventually, this is likely to be matched with increased taxes. So great care should be taken when planning for the future.
Neil MacDonald, group finance director, Aesseal plc, mechanical seals and support systems:
We want to see measures that encourage continued and new investment for the medium to long term. So while softer measures like training and green initiatives are nice, we want meaningful (financial and lasting) support with enhanced capital allowances and improved relief for R&D expenditure. And what we don’t want are any more costs associated with employment.
Jamie Borwick, founder and chairman of Modec, manufacturer of electric vans:
“Modec, the British manufacturer of electric vans, sees a great opportunity for government to turn aspirations of “low carbon industry strategy” into reality. The UK is at the forefront of low carbon technology development and has a significant opportunity to become a world leader for years to come if the right government support is made available now. We are optimistic that this Budget will make the 100% capital allowance available for electric cars applicable to electric commercial vehicles.
Tax incentives aimed at encouraging the uptake of electric vehicles are crucial at this stage and could have a dramatic impact on reducing CO2 emissions.
Mike Byrne, managing director of Newton Equipment, a supplier to the automotive sector:
• The low value of the pound impacts directly on our material, chemical and energy costs so an increase in the bank rate would put some life into the GB Pound. This will also keep a cap on food costs.
• Abolish the employer’s national insurance contributions and offset that by an increase in company tax. This will help employment because employer’s NI is a tax on jobs.
• Allow 100% first year write-off for all capital purchases to encourage industry to modernise.
• Leave R&D allowances where they are. R&D projects take a long time to reach fruition. Tinkering disturbs momentum.
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