The 20.4% decline in the UK’s GDP reported by the Office for National Statistics in April, the largest fall in a single month since records began, combined with and the OECD’s prediction of 11.5% decline in our annual GDP for 2020, the largest of any developed economy due to Covid-19, underlines the scale of the challenge in recovering from this devastating pandemic. So what can the UK Government do to support manufacturing and help revive the economy as restrictions are eased?
The introduction of innovative policy measures, modelled on the R&D tax relief scheme, with enhanced deductions for capital spend offers one effective way forward.
This approach echoes the view of MakeUK’s recent Manufacturing Our Road to Recovery report. It calls for a Future Factory Investment Scheme to support manufacturers which repurposed production to support the Covid-19 response to revert back to normal operations as well as those which are seeking to modernise their operations.
With an already gloomy economic outlook that is further threatened by the prospect of a No Deal Brexit at the end of the year, the UK Government will need to pull out the stops to support manufacturing to help kick-start the economy.
While it will have a limited impact for those manufacturers that are now forecasting a loss in this current year of trading, tax incentives could help. HMRC will, however, require resources to maintain a quick turn-around on claims, including R&D tax relief claims, especially for those companies requesting a cash credit. Fortunately, to date it seems this has been the case and most companies and providers are reporting very little delay in processing and settling claims.
HMRC could also consider introducing a quarterly mechanism for R&D tax relief claims to ensure cash-strapped companies are not waiting until the end of their financial year for cash credit payments. While this could be resource-intensive, HMRC has been laying the foundations and paving the way for such a move over the last few years through its ‘Making Tax Digital’ initiative.
The recent launch of a number of InnovateUK programmes at the beginning of July will go some way to stimulating a fresh wave of investment in innovation in areas in line with Government priorities, namely sustainability, decarbonisation and digitisation. These are all recognised by parties across the board as being a vital part of the UK’s improved competitiveness and future resilience. However, even with the availability of these new grants, many innovative manufacturers will struggle to find the cash required to make the upfront investment in order to qualify for the grants.
What is needed are mechanisms that reduce the upfront investment requirement. Government intervention to increase the banks’ role in offering a wider range of working capital solutions is crucial. This could include giving an increased role to challenger banks as we have already seen within the CBILs scheme.
Tiered enhancements to accelerate investment in specific types of capital assets – such as automated manufacturing equipment or IT infrastructure – would also bolster the order books of equipment manufacturers, and improve productivity within acquiring companies. Alternatively, reducing or suspending VAT on specific types of plant and equipment, perhaps those supporting the implementation of energy efficiency or digitisation projects, would act as an immediate encouragement for companies to invest and reinforce their focus in areas of economic priority.
Enhancing accessibility to grants is another potential tool for economic stimulus. Innovate UK and all grant-awarding bodies have an important role to play in amplifying publicity and improving application processes around funding to ensure those businesses that could most benefit are able to get access to it.
The UK Government should also be looking to longer-term improvements on existing support mechanisms to ensure public investment is fully aligned to our industrial strategy. Companies must also demonstrate greater commercial discipline - subject to careful scrutiny from HMRC if they are seeking tax relief - when investing in innovation projects.
UK manufacturing has shown innovation throughout the lockdown period, with numerous companies switching processes to manufacture healthcare products. Leamington Spa-based global vehicle manufacturer Drive System Design has also put an imaginative proposal to the Government to mobilise furloughed engineers to create collaborative programmes aimed at generating world-class IP for the UK.
Our manufacturing sector now requires both short and medium-term Government-supported financial support tools to stimulate further innovation activity. This will help ensure UK manufacturers remain resilient and are able to grasp new opportunities that will arise during the recovery which we all hope is imminent.