Alan Mak: Reform capital allowances and R&D tax credits to fire up investment and create jobs

1 Jul

Alan Mak is MP for Havant and Founder of the APPG on the Fourth Industrial Revolution.

Improving Britain’s productivity is key to both our economic recovery after Coronavirus and enhancing our global competitiveness post-Brexit. The best lever for firing up Britain’s productivity is incentivising more investment in the latest IT and software, new plant and advanced machinery – all proven catalysts of growth and efficiency. Failure to direct billions of pounds into these fundamental building blocks of our economy will hold back our recovery.

The State cannot be expected to do all the heavy lifting, especially given the Government’s substantial spending commitments to help the country through the lockdown and beyond. Instead, it must be businesses that take the lead, especially SMEs who have traditionally made up the “long tail” of unproductive companies.

Rather than a safety-first approach of hoarding cash, postponing investment and hunkering down, businesses must be incentivised to invest more in the coming months. This must be an economic recovery powered by bold investment decisions that create jobs, upgrade technology and boost productivity.

The dampening effect on capital expenditure (capex) and investment caused by Coronavirus is already large and destructive. One investment bank estimates that £23 billion has been slashed from this year’s capex budgets already, whilst the Bank of England predicts a 26 per cent drop in business investment for 2020. In 2009, as the financial crisis erupted, the fall was 16 per cent by comparison. Some of the country’s biggest employers such as BP and HSBC have already started cutting investment.

In practice this means IT systems and software – now at the heart of every business – being used for longer. Machines normally replaced every decade will have their life extended. Trucks and vans will be allowed to age. Outdated buildings that offer no room for new employees will be kept on. Research and development (R&D) could stall.

Reductions in investment not only have negative consequences for our country’s GDP, jobs and productivity, it also damages our capacity for R&D and our reputation as a nation that innovates for the future – key to our leadership of the Fourth Industrial Revolution.

Reforming and adapting two existing incentive schemes – the Annual Investment Allowance and the R&D Tax Credit – would have a major impact in reversing this decline in business investment and productivity.

Introduce a new Annual Investment Allowance ceiling for green or digital investments

Capital allowances enable a business to deduct the cost of qualifying items from their profits, lowering their corporation tax bill. This incentivises investment in key productive goods from machines to laptops.

The Annual Investment Allowance (AIA) is the annual cap on such deductions and its level has varied dramatically in recent years from £25,000 in 2012 to £500,000 in 2015. Until December 2018, the AIA was £200,000 but it was raised to its current £1M level from January 2019. The £1 million level is due to expire this December.

To encourage a green recovery and investments that focus on digitisation, the AIA could be allowed to fall back to the previous £200,000 ceiling, except for certain types of capital expenditure that achieve environmental or digital goals which would still benefit from the £1 million special ceiling. Replacing a diesel-powered machine on the factory floor with one powered by electricity, or digitising a production line by adding new software powered by artificial intelligence (AI), could be examples of investment that would be rewarded by the new special AIA ceiling.

Alongside the introduction of a special £1 million ceiling, the scope of what can be claimed through capital allowances should also be expanded to take account of the growing digital dimensions of every business. For example, digital tools purchased on a subscription basis (such as monthly website hosting costs) should benefit from relief not just one-off investments in physical goods (such as buying a new machine).

Increase R&D tax relief rates for SMEs and widen the scope of the reliefs

R&D tax reliefs support companies that work on innovative projects in science and technology, and enables the cost of qualifying projects to be reclaimed from HMRC. They’re especially effective for digital start-ups, who get a tax break and much needed cashflow back for critical work.

From April this year the relief rate is 13 per cent, but the lion’s share of R&D tax relief is claimed by large, research-intensive businesses. SMEs can currently claim up to 14.5 per cent in certain circumstances, but incremental increases such as this do not have a dramatic effect on investment appetite.

Often the most cutting-edge innovation, especially in the digital sphere, is carried out by small teams and growing start-ups – not just multinationals. To encourage more micro businesses and SMEs to pursue more R&D, new and much higher rates of relief should be introduced. For example, a rate of 25 per cent for SMEs with fewer than 150 employees, and 35 per cent for SMEs with fewer than 50 employees.

What qualifies for relief must also be broadened to include more of the digital tools that software developers use, including software testing tools and data analytics software. In addition, cloud storage fees, user experience development work and the cost of buying data sets needed to train algorithms for AI-driven start-ups should also be tax deductible.

Britain is currently 19th out of the 37 industrialised nations in the OECD when it comes to R&D investment, spending 1.7 per cent of GDP against the OECD average of 2.4 per cent. To match world leaders including Germany and Japan, who invest over three per cent, we must urgently update and expand our R&D tax relief regime.

This is the second in a three-part series on how to boost our economy after Coronavirus.

Robert Halfon: Johnson delivers for the workers but Starmer could win back their votes

1 Jul

Robert Halfon is MP for Harlow, a former Conservative Party Deputy Chairman, Chair of the Education Select Committee and President of Conservative Workers and Trade Unionists.

Blue-Collar Boris

I think readers of ConservativeHome will know my columns well enough by now that when I want the Conservative Government to be better, I am not afraid to say it. But it is also important to dance a jig or two, when they get it right.

Yesterday’s speech by the Prime Minister was a blue-collar speech in tooth and claw. When he said that he would focus on the people’s priorities, he really meant it.

For communities like mine in Harlow, and no doubt those in and around the blue wall, there will be a sigh of relief that there is no return to austerity, that the NHS is King, that schools and colleges will be better funded and housing and infrastructure will be built across our land.

Above all, we now have an extraordinary and exciting offering to our young people – an opportunity guarantee, comprising a choice between an apprenticeship or a work placement. This is a real policy that could make a difference to winning back younger voters as well.

The reason why this Boris Johnson speech was so important was not just the significant policy content, but because it set the direction of travel for the Conservative administration. After a few rocky weeks seemingly being bogged down in the Coronavirus mire, the Prime Minister is back on the front foot, setting out a Tory Workers’ agenda, that millions of lower income workers not only relate to, but can also get behind.

They have been reminded of why they voted for us again. Of course, saying that we are going to ‘build, build, build’ is easier than the building itself, but now the course/trajectory/path has been set, it is up to the rest of the Government to start constructing our New Jerusalem.

Starmer unstuffed

Patrick O’Flynn was one of the early media forefathers (and proponents) of blue-collar conservatism, way back in the days when Notting Hill was regarded as the preferred venue of the Tory éminence grise – a little unlike Dudley, where Johnson was yesterday. So, he is someone worth reading up on or listening to.

However, his recent article for The Spectator entitled, ‘Starmer is stuffed, filled me with absolute horror, because his line of argument, if accepted, would instill a large dollop of complacency in every Conservative.

In O’Flynn’s view, Starmer’s history and background, his inability to develop blue-collar policy, the cultural wars and the Tories’ reputation for economic competency, means everything will be alright on the night.

If we, as Conservatives, believe the above to be true, that way disaster lies; not only will we lose our majority at worst, or have a hung parliament at best, but our historic red wall gains in the North will crumble away.

Let me set out a few reasons why:

First, Keir Starmer is radically de-Corbynising the Labour Party – almost by stealth and under the cover of coronavirus. Almost all the way through the Shadow frontbench, from PPS’ to the Shadow Cabinet, moderates are being promoted. If you look at the calibre of Labour MPs – like Shadow Business Minister, Lucy Powell, or Shadow Home Secretary, Nick Thomas Symonds – you know that the Labour leader is being serious when he wants to present an alternative Government. Meanwhile, the NEC and Labour General Secretary are passing into the hands of social democrats, rather than the far left.

Second, whilst Starmer may not have had his Clause IV with the sacking of Rebecca Long-Bailey, it is certainly a Clause 0.4. In one fell swoop, Starmer has shown the British public that he will not tolerate the anti-semitism that has so infected his party over the past few years – and given a pretty sure signal that he wants to enter the doors of 10 Downing Street.

The idea that the public will care about Starmer’s past record as Director of Public Prosecutions is as fanciful as voters being negatively influenced by Johnson going to Eton, or his early and controversial newspaper columns.

Third, never underestimate the power of Labour. Their message of helping the underdog and the poor is enduring, still popular and extremely potent. They are not going to sit back and let the Tories rule for eternity. The psephological evidence shows that public opinion is leaning closer and closer towards Starmer for Prime Minister.

The latest Opinium poll shows that Starmer is preferred to lead the country by 37 per cent of voters, compared with 35 per cent who back Johnson. While the Conservatives remain four points ahead of their opposition on 43 per cent to Labour’s 39 per cent, the gap has closed from over 20 per cent in February and early March, when Jeremy Corbyn was leader. Scaling the Tory wall is far from insurmountable.

Fourth, on policy: Just because Starmer is a ‘metropolitan’ does not mean that his policies will be ‘metropolitan’, too. His Policy Chief is Claire Ainsley, who wrote an important book, The New Working Class: How to Win Hearts, Minds and Votes.

If her views, alongside those of a more communitarian nature as proposed by thoughtful Labour thinkers like John Cruddas, MP for Dagenham (with whom Johnson’s former Political Secretary, my colleague Danny Kruger, is collaborating on big society policy development), or Maurice Glasman, then they could actually have an exciting message to the public, winning minds as well as hearts.

If Tories are busy painting flags on planes, or building Royal Yachts, or shooting ourselves in the foot as we are wont to do on a regular basis – whether it be on free school meals or the NHS surcharge – and Labour are focusing on the cost of living, skills and genuinely affordable housing, I think it is pretty clear voters are going to be looking at the Labour offering, once again.

Having said that, if we come up with more of the blue-collar narrative, I set out in the first part of this article, alongside significant tax cuts for the lower paid, then perhaps O’Flynn could be on to something.

I just wish he wouldn’t say it, nor any other right-thinking individual. Conservatives have to take the next few years as if we have a majority of one, and remember that the political left want the Tories gone, and will stop at nothing to kick them out of Downing Street.

Andy Street: Our blueprint setting out the economic ambitions of the West Midlands

30 Jun

Andy Street is Mayor of the West Midlands, and is a former Managing Director of John Lewis.

Last week saw the launch of a blueprint setting out the post-Coronavirus economic ambitions of the West Midlands. As a manufacturing heartland, where draftsmen drew up plans for everything from steam engines to Spitfires, blueprints are in our blood. They illuminate our history. This intentionally ambitious £3.2 billion business case draws a clear trajectory to our region’s future.

As Mayor of the West Midlands, it’s my job to attract as much investment as possible. Rishi Sunak’s bold and decisive actions – notably through the furlough scheme – have provided unprecedented economic support for jobs during lockdown. Now, demands on the public purse are high. All investment must be fully justified, diligently used and – crucially – deliver real results. Every penny counts.

Our region was the UK’s fastest growing outside the capital until Covid-19 struck, and as a hotbed of export, manufacturing, construction and professional services, we play a key role in the UK’s economic success. This new blueprint lays out a powerful business case for how continued investment can spark rapid and sustained recovery, not only for us here but for UK PLC.

Our ambition is deliberate because the stakes are high. Research suggests we could be hit harder than most by the lockdown. When coronavirus struck, the West Midlands was in a strong economic position, with record employment figures and productivity growth well ahead of the national rate. However, our economic mix – dependence on manufacturing and business tourism, as well as a significant contribution from universities – leaves us vulnerable.

By following the blueprint we have drawn up, the Government can demonstrate its commitment to ‘levelling-up’ by backing the people of the West Midlands to deliver.

We need to do everything we can to get back on our feet quickly and return to the levels of success we were enjoying before the outbreak hit. That means driving a rapid economic recovery, safeguarding more than 135,000 jobs while building thousands of new homes. It also means learning the lessons of the financial crash of 2008/09, and listening to business.

Investment is crucial. However, while we need significant investment from the Government – £3.2 billion over the next three years – this is broadly in line with the £2.7 billion investment we have secured since 2017, which supported strong economic success here.

Our business plan is to build on our success and on the investment we have already attracted from Government, while leveraging much more private and public sector investment locally, including from our universities.

The blueprint sets out a business case for investments, while outlining the economic benefits they would deliver. For example, it directly supports our automotive sector by harnessing clean technology and electrification. A major investment package, including £250 million towards a Gigafactory producing state-of-the-art batteries, will unlock 51,700 green jobs.

The building of HS2, next year’s Coventry City of Culture festivities and the Birmingham 2022 Commonwealth Games present opportunities to create jobs for local people. By accelerating major infrastructure investment and supporting the recovery of the tourism and cultural sector we can unlock 33,000 jobs.

Then there is the West Midlands’ growing reputation as a hotbed for health research. By investing in healthcare innovation we can protect 3,200 jobs, while improving the health of our population.

Improving transport, housing and digital infrastructure will play a key part in a rapid recovery, while laying the foundations for future economic strength. We can build better transport and digital links to drive productivity and create thousands of jobs in construction. Schemes include extending rail, metro and bus routes, with cash for enhanced digital connectivity and to accelerate fibre connectivity in deprived areas. Reopening long-closed railway stations will better connect people to employment opportunities, attract investment into once-isolated areas and improve productivity.

The West Midlands has pioneered the regeneration of brownfield sites to tackle the housing crisis, while protecting the environment. We even have our own regional definition of ‘affordable housing’ applied at planning level by the West Midlands Combined Authority. We want to build 35,000 new homes – 15,000 of which will be affordable – with a focus on housing key workers. Plans include using a £200m investment package to regenerate derelict eyesores and £24 million for a new National Brownfield Institute in Wolverhampton, which will be a centre of excellence for land reclamation.

Investment to equip people with the skills needed for the future aims to help get them back into work. This includes helping 38,400 young people obtain apprenticeships and work experience, retraining 20,000 workers for in-demand sectors such as health and social care, logistics and business services, and upskilling 24,000 for jobs for the future.

Finally, we want to back the region’s businesses with support schemes – including helping them navigate their way through the post-lockdown world – creating or safeguarding 43,900 jobs.

This ambitious business case is based on our region’s experiences not only of recovering from the last downturn, but on the successes of the last three years. The blueprint has been developed as a team effort between the region’s local enterprise partnerships, universities, business groups and local authorities.  Crucially, some of our biggest employers have also shared their insights about how the region can play its part in securing a strong national recovery, putting central investment to good use.

For the UK to fully recover, all of its regions must recover too – creating a stronger country with a more robust, balanced economy.