During regular discussions, members of the advisory group for the Manufacturing Community identified a solution to address the twin issues of UK businesses being too over-geared by debt to attract necessary future investment and ‘at risk’ government ‘investment’ in lending guarantees and unsecured time to pay arrangements, expected to have a significant ‘call’ on the failure of the borrower.
The Coronavirus Business Recovery Offset Scheme (CBROS) was seen to be of most attraction and use/benefit to the manufacturing sector, it is likely to provide assistance to entities in the service and other sectors also adversely affected by the impact of lockdown and challenging trading circumstances experienced and still to be experienced in the coming months.
This suggestion was originally presented to officials at BEIS in late September. To share your feedback or to find out more about the advisory group please email email@example.com.
Government have backed ‘COVID-19 loans’ to UK businesses – those guarantees are at high risk of call in/default. Further Crown Debt has been advanced in VAT deferrals and time to pay arrangements. Many UK companies have been kept alive by these arrangements, all of which will start to unwind and require debt servicing, beginning in Q2 2021 and beyond.
To be competitive, globally, it is recognised UK manufacturers need to make more investment in plant machinery, innovative processes and in the skills and leadership and management capabilities of their people.
It is necessary to:
- Incentivise businesses to spend; 19% tax relief was not enough to do this before lockdown and will be even less so in the ‘uncertain outlook for the future’
- Incentivise banks to lend in the future to support that investment requirement by ‘de-gearing’ debt in UK businesses
Failure to address the above will increase the issues and risks for Government identified at, above, even further.
Grant schemes can be cumbersome, a relief system is necessary and we propose using the mechanism already in place for R&D tax credits with HMRC to provide a targeted reward/incentive to businesses for ‘doing the right thing’ and to address the above realities.
We propose a Coronavirus Business Recovery Offset Scheme (CBROS) which provides 130% enhanced credit against COVID-19 debt (CBILS, BBILS, CLIBILS, Time to Pay) as an immediate deduction against amounts owing on COVID-19 debt.
It is proposed to work like the R&D scheme for SMEs at an effective rate using the current corporation tax rate as a base (though the credit rate need not necessarily be tied to the corporation tax rate) of 43.7%, effectively 230% of the original expenditure, at corporation tax rates, currently 19%.
Worked examples of this proposal are shown in later in the article.
CBROS should be available for the following categories:
- R&D expenditure
- Export activity (including training, documentation, devising virtual selling processes, trade missions, establishing local offices/agencies etc.)
- Skills outside the apprenticeship process
- Capital expenditure focused on investment in enhancing resilience of UK-based supply chains
The new provisions and application process would ‘mirror’ those for an SME making an R&D claim as of now, but on this occasion, as we believe that larger businesses will be affected in a similar way to SMEs, the enhanced credit should be available to the limit of COVID-19 debt exposure only, to all UK entities. This will also provide genuine incentive for larger entities to continue to invest in UK based innovation programmes rather than curtail or move production outside the UK. The effect therefore would be for this scheme to be a true grant system but using the existing mechanism established and operated successfully already, for R&D tax claims by HMRC.
For avoidance of doubt this is NOT intended to provide double relief of both CBROS and corporation tax.
It is intended that this scheme advances the credit available to a company for doing ‘the right thing’. It is not intended to be an additional relief over and above what would normally be available through the tax system, but it is intended to extend its reach, the benefit to be taken where relevant, providing an alternative to tax relief.
We believe the above will assist in:
- Promoting positive ‘recovery investment’ in the short term, by reducing gearing and increasing lending attractiveness
- Ensuring that as much as possible of the government’s commitment to supporting business through COVID-19 debt measures and security is put to sustainable use and not called in, in the event of insolvency
- Helping to promote the long-term benefits of the research and development tax credit scheme to a wider ‘corporate audience’
- Ease of application
- Providing rapid assistance without needing to establish a specific grant scheme
- Inbuilt accepted audit and evidence process
- Fair and equal eligibility
More detail on qualifying categories of expenditure
- R&D: As an alternative to an existing R&D tax claim, for which a company has to wait until after its year end to benefit financially from. The majority of UK businesses have either December or March year ends, which for many businesses will mean that conventional R&D tax claims will not see benefit before COVID-19 debt has to start to be paid off. In addition, the benefits conveyed on larger businesses are restricted and, to the limit of COVID-19 debt, CBROS will prove a more attractive alternative. Of course, claims made under CBROS will NOT replace any R&D tax claim, preventing any ‘double benefit’ for companies.
- Export activity: Current export incentives are extremely limited for SMEs, the passport to exporting products is limited in its value and requires a significant time commitment from businesses. Existing export credit and guarantee support only kicks in when a company has generated the lead and is ready to make a sale. Many SMEs in the UK resist export as it requires considerable up-front financial commitment, and this will be further frustrated by the additional administration required to trade with the EU states in future. We believe that a successful UK economic recovery will need increased exports as a key element; therefore there needs to be additional, attractive incentives for businesses not currently exporting, or for whom there is only limited current activity, to drive forward export activity at a higher level than currently. We would propose to augment existing support by providing ‘seed incentive’ to give enhanced CBROS credits to business seeking to speculatively promote and generate future export activity.
- Skills: Whilst the existing and developing incentives for apprenticeships are welcome, there are issues with the apprenticeship scheme, which makes it inappropriate to many businesses, particularly SMEs. In addition, particularly in the post Brexit and COVID-19 era, their skills requirements and development needs will require renewal/refreshment of the business skills base in the likes of export documentation, terminology etc. There are also critical needs for leadership development and, indeed, coaching and mentoring to equip and facilitate businesses and their leaders to drive future economic success. Investment in more on the job and ‘bite-sized’ people development currently has limited support. In the manufacturing environment, there is a need for businesses to invest by providing time from some of their key earners in supporting, training and providing knowledge transfer to new workers. This is a big decision for many small businesses as it has a direct and currently unsupported effect on productivity. Likewise, as investment is made in new I4 equipment and processes, there is a need to retrain the existing workforce in its use. Clearly not an apprenticeship activity, this investment again currently directly affects profit and acts as a disincentive for capital investment. Activity of this nature, much like R&D, can be captured from time records and form part of CBROS claims, accordingly.
- Capital expenditure: Investment is needed in equipment and tools to build resilient UK-based supply chains. The drivers for this investment comprise various threads:
- Modern manufacturing processes require increased investment in new processes (e.g. additive engineering) and more automated and robotic processes to improve and maintain productivity. UK manufacturing has lagged some way behind competitors in Europe and beyond, in this investment and in the ‘new normal’ this has to change to ensure that our manufacturing industry (and the high value jobs it sustains) survives and thrives.
- Boosting productivity by replacing replace older equipment with better modern equivalents, which can often also bring improved environmental performance and connectivity. This investment will make UK manufacturers more competitive in global markets.
- Adding capacity for processes which were previously off-shored and are now being re-shored, giving greater local resilience and more agile supply. Re-shoring carries investment costs, however, so many businesses have resisted making a change which would of course not only secure UK jobs but also create new job opportunities. An incentive here will help businesses justify the investment, obtain support for related required bank lending and critically maintain UK based OEM supply chains.
The current 100% Annual Investment Allowance, at a Corporation tax rate of 19%, has proved to be insufficient to stimulate investment pre COVID-19 and inclusion of such expenditure within CBROS will aid this.
Other ideas as developments/variants, for consideration
- Allowing companies without COVID-19 debt a lower level of enhanced relief as an additional deduction against their tax liabilities, say 150%, giving effective corporate tax relief at 28.5%
- Extending the above key areas to, for example, expenditure on installing sustainable energy systems in premises that don’t qualify for R&D etc. as it is ‘third party’ technology
Worked examples and possible variations to explain how this scheme will work in practice
Fabweld is a specialist metal fabricator serving the construction industry, employing 200 people in Birmingham. It is a £9m turnover manufacturing business that was making profits and reinvesting into capital projects.
The business requires constant capital investment funded by finance loans to remain competitive and is heavily geared.
The company has successfully negotiated a £1m CIBLS loan and has taken advantage of a £250k VAT deferral. The CBILS loan is repayable over 10 years and, although interest free for the first 12 months, the rate is 5%.
With the reduction in turnover due to COVID-19, the gearing of the company has worsened. However, investment is still required.
Business plans assume a £500k re-tooling requirement for robotics to improve efficiency and retain custom.
The view of major banks is that no new loan is available as there is insufficient security and evidence of lack of security to service debt due to the economic outlook and current borrowings.
How CBROS works
The company invests £500k for the re-tooling and this is thought to generate additional turnover of £300k, with profits before tax generated of £100k.
The company claims capital allowances under the current tax rules.
As the re-tooling is classed as qualifying investment, the CBROS scheme allows the company to claim additional tax credits equivalent to 130% of the expenditure for tax relief at corporation tax rates, currently 19%. This is calculated to be £124k (500k x 130% x 19%).
The tax reduction is effectively a non-taxable grant and is shown within operating profits at £124k.
This operates in a very similar way to R&D Tax Credits but with the tax reduction credit payment immediately being sent to the CBILS lender as a reduction in debt of payment £124k, reducing the company’s gearing and the government’s security guarantee risk.
Floyd Engineering is a specialist industrial ceramics coatings business employing 220 people in Dudley. It is a manufacturing business turning over £15m but making small profits as the domestic market is deteriorating and it now wishes to export.
The business is machinery based and is a partial service company with customers providing the metal on which the ceramic process is placed.
Capital investment is required from time to time; however, people and training are key to the business.
The project cost is £400k including staff training.
The company has successfully negotiated a CBILS loan of £500k to help with the COVID-19 downturn in trading, plus a VAT deferral of £300k.
The CBILS loan is repayable over 10 years and, although interest free for the first 12 months, the rate is 5%.
The view of major banks is that no new loan is available as there is insufficient security and evidence of lack of security to service debt due the economic outlook and current borrowings.
How it works
The company invests £400k for the project which will help protect the business in the future.
The company claims tax deduction in the profit and loss accounts under the current tax rules.
As the project is classed as qualifying investment, the CBROS scheme allows the company to claim additional tax credits equivalent to 130% of the expenditure for tax relief at corporation tax rates, currently 19%. This is calculated to be £99k.
The tax reduction is effectively a non-taxable grant and is shown within operating profits at £99k. This operates in a very similar way to R&D Tax Credits but with the tax reduction credit payment sent to the CBILS lender as a reduction in debt of payment £99k reducing the company’s gearing and the government’s security guarantee risk.