As well as balancing the books, Rachel Reeves should use the Budget to help businesses recapture their joie de vivre, says Claire Blackburn
The new government’s first Autumn Budget on 30 October is arguably the most anticipated fiscal event in recent memory. Balancing the books will be a top priority and the £22bn hole in public finances highlighted by the Chancellor, Rachel Reeves, means a fine balance between raising revenue and establishing a framework for growth will need to be found.
PwC’s latest UK economic outlook forecasts moderate increases in growth in the next few years, but we predict a successful industrial strategy implementation would potentially produce a £650bn uplift to UK GVA by 2035.
Helping British businesses to recapture their joie de vivre will be crucial. We now face a new era where innovation has never been more important as new technologies such as AI promise to redefine many industries. In fact, our Global CEO survey suggests 45 per cent of global CEOs said their company would not be viable in a decade without a change of direction.
The UK government may want to remain thrifty for now, but in order to meet its true potential the UK’s thriving $1 trillion-valued research & development (R&D) industries and flourishing life sciences need sustained support.
R&D is expensive but there are ways to improve the mechanisms for innovation through simplification and certainty of funding that won’t break the bank.
Speaking to businesses here and abroad, one of the biggest gripes we hear is the slowness and complexity of the UK’s tax administration. Many overseas businesses have faced long delays when registering in the UK, stagnating foreign investment. Making it easier and faster for businesses to register for VAT or for those with a low-risk profile to obtain non-statutory clearances from HMRC would be low cost wins.
Additionally, the VAT registration threshold (£83K) is at a point when many sole traders would otherwise want to hire staff and expand their business. Reviewing and changing the threshold could be a welcome trigger for SME growth.
Merging the SME and large company R&D schemes in April 2024 was a step forward in simplifying the tax incentive environment. The new SME R&D regime for R&D intensive companies will support our most innovative companies, but the rule structure means there are fewer companies expected to qualify.
Businesses need incentive schemes that provide long-term certainty. At the Autumn Statement 2023, the temporary measure of full expensing (reducing taxes by 25p for every pound invested), was made permanent. This is welcome but could go further working in tandem with the R&D and patent box schemes to incentivise investment.
Open the patent box
If the Chancellor does have room for any giveaways, the patent box, allowing companies to apply a lower rate of corporation tax to profits earned from its patented inventions, could be expanded to more intellectual property, such as in France where software is protected by copyright qualifiers. This would bring into scope more emerging technologies such as AI where we have a gap as currently only 1,500 companies claim patent box compared to approximately 90,000 R&D claims.
There are also some gaps in incentives for specific ‘life-cycle’ moments of a business. When UK businesses seek to scale up, they face a lack of funding to aid this process, needing to turn to foreign investment to plug the gap. Funding allowances do not provide needed support for businesses yet to generate profits from R&D. Providing this during the expensive scaling up period, before profit is made, would allow the process to run more smoothly and avoid delay.
The government will be conscious of the need to showcase its pro-business agenda on 30 October. Nurturing future innovation and building on the progress made with R&D intensive industries are crucial drivers of UK economic growth. Clear, long-term policy direction provides the best basis for success, twinned with consultation with business – both will be critical to successful reforms.
Businesses are looking for confidence. Big Budget announcements grab headlines, but the impact of smaller tweaks and interventions done consistently to smooth the existing system should not be underestimated.
Claire Blackburn is UK tax leader at PwC