Tax and regulation policy briefing

The CBI's new report sets out the importance of the R&D tax credit in reaching the 2.4% target

This month saw the CBI publish a new report “Untapped investment”. This is part of our wider policy work on how government policy can really help to turn the dial on business investment in the UK. It follows on from our Catching the Peloton report last year that analysed the role of the tax landscape in stimulating business investment.

This latest report focuses predominantly on the R&D tax credit. Both economic evidence and member anecdote indicate this is an effective tax incentive at spurring private sector investment in R&D. However, our analysis found that at the current pace of investment, the UK is set to miss the R&D investment target by £19bn in 2027 and risks missing out on the enormous benefits R&D could bring to the economy. This report explores the R&D tax credit in more detail to understand ways it could be improved to help to close this gap.

Our report found that, to stimulate further business investment in R&D, it is crucial for the R&D tax credit to keep pace with the changing nature of R&D and our international competitors.

More specifically, the report calls on government to take the following action at the upcoming Autumn budget:

• Widen the scope of eligibility for the R&D tax credit to the following R&D activities:
  • Capital expenditure
  • Data-driven innovation
  • Outsourced R&D that does not currently qualify
  • Upskilling and retraining of staff.
• Review the availability of data on R&D expenditure to ensure the R&D tax credit’s effectiveness continues to be monitored appropriately
• Ensure the R&D tax credit is internationally recognised as world-class by regularly benchmarking the UK’s regime against international peers.

Ahead of the budget in the autumn, we will continue to share the messages of this report in conversations with government. Then looking ahead to the spending review next year, we will be working on a wider piece examining the various policy levers the government has at its disposal to encourage business R&D investment and how far each could go in bridging that £19bn gap.

CBI hosts roundtable with Treasury on business investment

In the leadup to the Autumn Budget, this month saw the CBI host a roundtable between members and HMT on business investment. The aim was to discuss the factors tipping marginal investment decisions over the edge, the main blockers to increased investment and when the tax environment comes into the decision-making process.

The following key themes came out of our discussion:

• Certainty and predictability in the taxation and regulatory environment is crucial for businesses to be able to plan for investment. The UK’s environment is becoming less certain and therefore it is important for the government to consider what disincentives business investment, as well as tax incentives
• The overall attractiveness of the UK as a place to invest is a vital factor in investment decisions. This is much wider than the tax and regulatory environment, and includes factors such as infrastructure, talent and culture.

The UK has sat at the bottom of the G7 league table for business investment since 2001 and therefore how policy can play a role in stimulating business investment will continue to be a key part of our policy work going forwards and will frame much of our Budget submission in the autumn.

The CBI sets out business priorities for a one-year spending review

In what was expected to be a big affair in the Autumn, earlier this month, the new Chancellor announced that the spending round would in fact be fast-tracked. Resource budgets have only been set until 2019/20 and therefore at a minimum the Chancellor needed to set out departmental resource spending for next year (2020/21). In a bid to ensure departments had enough time to prepare for Brexit, the Chancellor decided to set departmental resource budgets for only one year, rather than the typical three-five years.

With departments required to make their submissions towards the end of August and the Chancellor set to announce his plans on 4 September, there was a tight window for getting the CBI’s messages across. While there was no formal submission period, the CBI were still able to quickly turn around a response outlining the business priorities for a one-year spending review.

At the time of writing, the Chancellor has just set out his one-year spending review in the House of Commons. This turned out to be a much lower key event than expected and was largely overshadowed by Brexit and the developments in Parliament. But there were some big announcements, and most significantly we saw an ‘end to austerity’, with the Chancellor announcing that all departments will see an increase in their budgets at least in line with inflation. This was the fasted planned increase in resource budgets in 15 years.

On the education and skills front, there were some big wins for business. Schools and colleges saw additional funding.  School funding was set out for three years: an increase of £7.1bn by 2022/23 compared to spending in 2019/20. We also saw a focus on strengthening the UK’s international image and local economies, two areas where the CBI called for action.

And while capital spending was not in the scope of this spending round, it was still positive to see the government recommit to the R&D target and commit to publishing the infrastructure strategy in the Autumn.

You can see a full analysis of the Spending Review here and see the impact the CBI had here.

Business outline the crucial principles for guiding international discussions on the tax challenges of digitalisation

As mentioned in the May update, the debate on how to reform the international corporate tax framework in response to the increasing use of digital technology and digitalised business models continues.  Following the OECD’s release in May of a roadmap to finding a consensus-based solution to this challenge, as we step into Autumn, developments are expected to move quickly as members of the OECD Inclusive Framework work towards providing an early political steer to the project by the end of this year.

In August, Business at the OECD (BIAC) wrote to the Chair of the Steering Group of the OECD Inclusive Framework, outlining a number of high level principles that business feel will be crucial in guiding international discussions on the tax challenges of digitalisation to a successful consensus that is both administrable and growth-oriented.  As the only business organisation representing British companies at the OECD through its membership of BIAC, the CBI worked with BIAC to ensure CBI member’s views were included within the letter and that these crucial principles are fed into HM Treasury.

If you are a multinational enterprise and concerned about out how these developments may impact your business, contact Abigail Agopian for further information and ways to get involved.

CBI submits joint letter to TSC members on business rates

This month saw the CBI make more noise on business rates by submitting a joint letter to members of the Treasury Select Committee on their inquiry into the impact of business rates on business. The TSC was due to publish its recommendations following its inquiry in September in time for it to feed into the government’s planning for the Autumn Budget. However, the government reshuffle has left the TSC without a chair and with a reduction in members until new ones are appointed.

The letter emphasises the urgency for the TSC to publish their recommendations before the Autumn Budget and sets out why the risk of delaying the report will be bad news for business.

We stressed that the burden of business rates has been an issue for too long and it is crucial that the government takes well informed action at this year’s budget. Publishing the report will ensure that any action taken by the government will reflect the significant efforts of not only the TSC, but also of those that submitted written or oral evidence (including the CBI’s response).

It is clear that August did not end up being a quiet month, but it was a month with lots of interesting policy work. And there is still plenty to look forward to in September. So what should you be looking out for in the coming month?

The CBI will plan for the various fiscal events on the horizon

The month of September will be taken up mostly with planning for the upcoming Autumn budget, or budgets, depending on what happens in the next few weeks. The timing and the number of budgets we will see depends very heavily on a few factors and there are a number of different scenarios that could play out.

Most notable factors dictating the timetable are whether we will have a General Election and whether a no deal is looking likely.

Should a General Election be called, the new Government is likely to hold a budget immediately. In the event of a no deal, the Chancellor may want to announce some pre-emptive measures to shore up confidence in the economy and we may also see a secondary Budget held after October 31^st. There is also the option of a “business as usual” budget where we would see a budget in October or November as in previous years.

The CBI has been planning for all of these different scenarios and in each case would look to make representations to the Chancellor setting out business’s priorities.

So lots of uncertainty, but the CBI are geared out for which eventuality (or eventualities) we will ultimately see. Please get in touch to influence our Autumn Budget submission here.

There will be plenty of opportunities for members to get involved

In September the CBI offices will welcome Bill Dodwell, Director of the Office for Tax Simplification (OTS) to hear directly from members their views on the OTS’s new project, to explore tax reporting and payment for the self-employed.  If your business uses a large volume of flexible labour their proposals may affect you. If you are interested in attending this roundtable or any other areas of the work of the OTS, contact Matthew Lewis.

We will also be holding our indirect taxes working group and our Tax Committee.

The CBI will publish analysis on Labour’s nationalisation agenda

Labour’s nationalisation agenda is a key concern for business and while there have been a number of studies seeking to estimate the cost of Labour’s plans, the CBI have been doing their own analysis. As well as estimating the up-front cost of nationalisation, the analysis will also estimate the ongoing investment costs required to maintain and upgrade the infrastructure, the impact this will have to the public finances and the impact on savers and pensioners. Look out for our press release towards the end of September.