Business minister denies disconnect between BIS and HMT on tax

Posted on 3 Nov 2009 by The Manufacturer

Ian Lucas MP, the business minister, has told The Manufacturer that BIS and HM Treasury communicate well, despite the evidence that parts of the tax system are disconnected from the needs of manufacturing.

Mr Lucas, the Parliamentary Undersecretary of State for Business, Innovation and Skills (BIS), said his department and the Treasury had very close connections and communicated daily on taxation, at an event marking the first anniversary of government’s New Challenges, New Opportunities Strategy.

The claim was made in response to evidence presented that the Government has not recently executed changes to the tax system that favour manufacturing, a capital intensive sector with long lead times and long term tax planning requirements.

Since April 1 2008, when the Government dropped the corporation tax rate from 30% to 28%, there have been a series of targeted reliefs and accelerated reliefs aimed at specific groups, such as small businesses and those which invest in energy-reducing capital. This drip-fed strategy has been criticised by tax and business commentators for lack of continuity and awareness of the needs of manufacturing, which has longer lead times than the service sector.

Mr Lucas denied there is a disconnect between BIS and HM Treasury, and said that his ministerial remit is not directly responsible for disseminating tax changes to business. “This is the nub of the problem,” said Andrew Churchill of JJ Churchill Engineering. “Who is in charge of the tax policy, who advises whom on the real needs of business? Manufacturing is capital intensive, requiring long term planning – a series of targeted reliefs don’t help.”

Churchill, a member of the Ministerial Advisory Group on Manufacturing (MAG) and a board member of EEF, says there needs to be more evidence that government departments are linking up. “Fundamentally, government needs to operate a taxation system that is a) fair and competitive vis-a-vis other European taxation regimes and b) isn’t going to be changed every few months. It must be attractive to multinationals to domicile or manufacture in the UK.”

In the 2009 Budget, the Government increased the capital allowance to 40% on capital purchases worth up to £50,000, a measure that targeted small businesses. Since then a green expenditure capital allowance, assisting companies which use energy-saving plant, and a water efficiency allowance, were introduced. But tax consultants have said these can be excessively complex and bureaucratic to complete and have put companies off claiming, so many don’t bother. “A manufacturer might make tens of thousands of parts, while only several dozen are eligible for this accelerated capital allowance,” said one tax accountant.

The water efficiency capital allowance, an accelerated relief, rewards companies who install flow control meters and equipment to reduce water consumption.

Speakers at the manufacturers’ organisation EEF’s recent panel session, Can manufacturing save the UK economy? said two revisions to the credit insurance top-up scheme was punitive for finance directors calculating tax liabilities. Several senior manufacturers have called for a simpler, more flat rate corporation tax system with lower rates financed, if needed in the short term by fewer targeted reliefs, not a series of overly targeted and complex reliefs.

The inference with this fragmented, targeted relief tax strategy is that BIS is not iterating the needs of manufacturing businesses to the Treasury.

“Governments should focus upon reducing the corporation tax rate in the UK to restore our competitive tax position with our major European and global competitors,” says Stephen Herring, Senior Tax Partner at accountancy firm BDO LLP. “This would be far more helpful to businesses than introducing further complex and excessively targeted reliefs seeking to satisfy too many government departmental agendas.”

The Pre-Budget Report is published in November – read for how it will affect manufacturers.