George Bull

Written by: George Bull

George Bull

Senior Tax Partner

How does the UK government plan to use the tax system to build a modern industrial strategy?

Over the years, the tax system has been used by Chancellors of the Exchequer to achieve specific economic, social and political objectives. With the publication of the UK Government’s White Paper setting out plans for a modern industrial strategy, we’ve been reviewing the detail to understand what role the tax system might play.

To be honest, we’d expected that much greater emphasis would be given to ‘Good Work’, the recent Taylor Review of Modern Working Practices, and related tax issues. It turns out that, while the tax system is seen as having a role to play in the UK’s industrial strategy, this is very much subordinate to other initiatives.

Against that background, here’s a quick summary of the key tax measures.

First, to increase the rate of R&D tax credit to 12 per cent. This is currently set at 11 per cent with the increase being announced in last week’s Budget statement. Please excuse the cliché but at first glance a 1 per cent increase is not going to set the world on fire. That said, if you consider the increase in the rate of relief alongside the planned decline in corporate tax rates by 2020, the after-tax value of the relief will have risen by a quarter since 2014. The proposal to introduce an advanced clearance process for R&D expenditure credit (RDEC) claims is also to be welcomed as long as the process is an improvement on the original pilot for SMEs for which uptake was very low.

Second, to ensure that the education system for those aged 18 years and over is accessible to all and is supported by funding system that provides value for money and which works for both students and taxpayers; incentivises choice and competition across the sector; and encourages the development of the skills which the UK needs. Last week’s Budget statement made a commitment to ensure that graduates no longer over-repay student loans, by ensuring a more joined-up approach between HMRC and the Student Loans Company. While that is helpful, the modern industrial strategy document seems to rely most heavily on an ambitious National Retraining Scheme.

Next, the strategy promises to use taxation, among other things, to support innovation in a low carbon economy. At first reading, this appears to be a welcome and ambitious promise. However, on closer scrutiny the immediate aims seem to relate to electric cars. The notion of a whole-system approach to the decarbonisation of energy infrastructure systems has been postponed until at least 2022.

Low corporate tax rates coupled with the use of the tax system to encourage long-term Patient Capital get a mention, but with no great feeling that the authors of the report have considered what this might amount to in practice.

Similarly, while the Taylor review is mentioned, the ‘People’ section of the strategy contains little more than a commitment to act on Matthew Taylor’s recommendations. While one can understand that the Department for Business, Energy and Industrial Strategy would not wish to make commitments which cut across the intentions of other departments, the Cabinet as a whole has had the benefit of the Taylor review since July 2017, so it is very disappointing not to see more detail on this.

And the final verdict? While the strategy White Paper contains many fine words, it is distinctly lacking on detail. In the context of tax and also of the Taylor review, it’s difficult to escape the feeling that lip service only is being paid to powerful tools which could be deployed for the benefit of the UK economy and all our citizens.

For more information, please comment below or get in touch with George Bull.

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