The Chancellor claimed that inflation is the enemy of stability in today’s autumn budget and brought forward a plan to balance the books over the next few years. Whilst inflation has indeed been a challenge for manufacturing, the biggest barrier to growth has instead been uncertainty. The latest episode of announcements improves on certainty levels somewhat, but difficult times are ahead. In real terms, the overall increase in the tax burden is about 1% greater now which is the highest it’s been since WW2.
Nevertheless, many manufacturers continue to see strong demand for goods, but limited visibility of the near future is quickly dampening expectations and investment plans. Several announcements made today will have implications for manufacturers going forward. Three significant announcements relevant to manufacturing include: Business Rates, R&D, and the National Living Wage. Whilst there was little information on energy support for businesses, it is expected the finer details will be published in December.
Business Rates
Manufacturers pay rates on factories and warehouses, and for decades now this tax has been a disincentive on capital investment. Whilst a few exemptions have been applied to improve incentives to invest in green technologies, long-term reforms are still needed. However, in the short-term manufacturers faced a sharp inflation-adjusted rise in rates from April 2023 which has now been blocked from happening with a £13.6bn package from Government to freeze the rates multiplier over the next 5 years. Additionally, the Government will abolish downward transitional relief caps, so businesses who expect to lower their rate bills next year will benefit immediately. This change is a positive one for manufacturing.
In addition, the Government has announced a more generous Supporting Small Business Scheme worth over £500m to project SMEs, however it is unclear how this will impact manufacturers just yet.
Whilst the extension of the relief for retail, hospitality and leisure is welcome for that industry, manufacturing should ideally be included as they extensively use properties to produce the goods that retail, hospitality, and leisure sectors make use of. Particularly as increased supply-chain disruption has resulted in greater use of warehouses to ensure we are able to access critical goods.
Surprisingly, the Chancellor has delayed the improvement relief, which provides 12 months of 100% business rates relief on qualifying improvements to existing properties by 1 years to start in April 2024. This likely means any property enhancements made this year will now be accounted for in the revaluation process which could prove costly for those that were intending to take advantage of it.
Research & Development
Manufacturers account for about two-thirds of private sector expenditure on research & development, or about 64p of every £1 spent on innovation. The tax credit system is a great benefit to the industry, and we need it to be more generous and flexible for manufacturers.
However, today’s announcement is a blow for SMEs which accounts for approximately one in five manufacturing businesses and rises to nine in ten if you include micro businesses. What the Government considers fraud is often just “optimisation” from the small manufacturers’ perspectives, who are making the most of what is available to them. In a liquidity crisis such a move is poorly timed for SMEs. The Chancellor has announced that the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%, making the SME scheme less generous.
On the other hand, the Research and Development Expenditure Credit (RDEC) will increase from 13% to 20% which will benefit larger businesses relatively more. The Government aims to simplify the system to a “single RDEC-like scheme for all”. It is not clear what this will look like, but Make UK looks forward to working closely with Government on its design. R&D will remain a significant activity in manufacturing, and we must be careful not to drop the ball if we aspire for the UK to be a science and tech hub.
The good news is Government spending on R&D is not expected to fall generally and will increase to £20bn a year by 2024 which ensures innovation remains a priority for industry.
National living wage (NLW)
The NLW will rise by 9.7% to £10.42 an hour from the 1st of April 2023. Whilst this is great news for workers and necessary during the cost-of-living crisis, manufacturers are facing a cash flow crisis already with investment intentions falling rapidly. Many manufacturers have already given inflation busting pay rises to retain workers and this announcement adds an extra layer of complexity to balancing the books next year. To maintain pay differentials this will result in rising costs for businesses, many of whom are already considering job cuts to deal with the energy crisis.
However, despite the increase in pay for workers, there will be a 7% cut in real household disposable income for the average worker more than wiping out any gains made over the last few years anyway. This means the burden of protecting workers falls more on firms rather than Government.
What else was in (or not in) the budget?
Energy
In addition to the above, the Government also announced increases to levies on energy profits, which will increase to 35% for oil and gas, and an additional levy will also extend to electricity generators who will be taxed a temporary 45% on extraordinary profits (defined as electricity sold above £75MWh).
Furthermore, following the end of the energy price freeze in April 2023, the Government has announced that for households the cap will be raised to £3000 for a further 12 months. Though this provides some certainty for households, there is little detail on how businesses will be supported following this date. As far as we know, support will continue in some shape or form for vulnerable businesses but the definition of “vulnerable” is yet to be set. This review is being led by HM Treasury and will be published by 31st December 2022. The announcements today suggest in real terms the burden of these tax changes will be borne primarily by businesses.
Long-term the focus is on energy efficiency. The Government is announcing an Energy Efficiency Taskforce (EETF) to bring down energy bills with efficiency and demand reduction, targeting a 15% reduction by 2030. This will include £6bn of funding between 2025 and 2028, in addition to the £6.6bn already in play.
Infrastructure
The Government has announced that a series of significant infrastructure projects will receive additional funding and approvals to continue construction, includes the Sizewell C nuclear power plant, HS2, Gigabit 5G and the Northern Powerhouse rail.
Made Smarter
A quiet but major development includes the expansion of Made Smarter to the East Midlands to support the adoption of digital technologies in manufacturing. Make UK has long called for the roll out of Made Smarter nationally, and today’s announcement indicates Governments commitment to rolling the project.
Trade
Import tariffs will also be abolished from 100 goods. The full list of what these goods are is not yet clear, but the chancellor indicated examples related to components within the transport sector. A reduction in import costs may help reduce inflationary pressures businesses are facing when trading overseas.
Finally…
Although these were not discussed in today’s budget several positive changes that have been announced over the last few weeks remain and will significantly support manufacturing trade and investment. These include:
- CE marking to continue being recognised in the UK, reducing costs for businesses
- Annual Investment Allowance £1m allowance made permanent so businesses can continue investing
The budget announcements made today are generally sensible, and for many businesses hard times were already expected. However, there is little scope for growth and instead it is clear we are operating in survival mode. Emphasis needs to shift towards increasing investment and economic growth in the long-term, particularly by increasing manufacturing’s contribution to GDP from 10% to 15%, which Make UK estimates could add an additional £140bn-£150bn to UK GDP.