Welcome
Daily Tax Report: International

INSIGHT: Manufacturing the U.K.’s Regeneration

July 16, 2020, 7:00 AM

The outbreak of Covid-19 has been described as Britain’s worst crisis since the Second World War and has caused widespread disruption to almost every aspect of life. Since lockdown began, the economy has experienced a significant shock, with gross domestic product (GDP) falling by 20.4% in April; the biggest monthly fall since 1997.

This monthly contraction was driven largely by a fall in output in construction and manufacturing, which were hit much harder than the services sector as a whole, due to the government’s measures to control the virus, making business as usual impossible for workers in this industry.

A Key Player

Despite these challenges, the manufacturing sector plays a significant role in the U.K. economy, providing over 2.7 million jobs, making up 191 billion pounds ($241 billion) of economic output and accounting for 65% of U.K. research and development (R&D) spending.

As the U.K. seeks to rebuild the economy, support for sectors such as advanced manufacturing and technology will become paramount, as these are naturally rich producers of valuable intellectual property (IP) and the innovation which will create sustainable growth and even more jobs for the future.

It is encouraging to see the government already addressing this by putting measures in place including the recent 186 million pounds of R&D funding to back seven major new research and innovation projects, along with Sajid Javid’s plans for growth restoration post Covid-19 that accounts for the manufacturing industry.

However, the virus has been a stark reminder that there needs to be a focus on investment in valuable R&D projects, innovation and IP which needs to be a significant priority for the government if it is going to deliver a sustainable and meaningful recovery for U.K. Ltd/Plc.

The Value of Local Solutions

The implications of the crisis for U.K. manufacturing firms have been considerable. This is a wake-up call in terms of the focus needed on regenerating an important sector beyond the crisis in an effective and impactful way. There will be no easy or immediate route to success, but action needs to start now to build on existing support, and to develop a strategy for the future.

One crucial way to rebuilding and rebalancing will be to look at the U.K. supply chain and improving domestic capability. Manufactured goods account for the majority of imports—53% in 2018, worth 367 billion pounds. The U.K. has a negative balance of trade in manufactured goods, meaning the U.K. imports more than it exports. In fact, the trade deficit in manufactured goods has widened over the past 20 years: in 1997, it was worth 7.5 billion pounds; in 2018 it was worth 92 billion pounds.

The development of automation technologies and cheap offshore labor has resulted in many companies moving production overseas. This trend has continued apace since first emerging in the late 1980s as cost-saving became the driving force behind global sourcing, driving manufacturers towards lower cost regions, typically in Asia.

Despite the benefits, this is not going to solve our problems. We need to start buying closer to home to deliver a return to long-term, viable growth. The U.K.s manufacturing expertise is cutting edge, therefore we should make the most of our resources to promote a stronger, faster recovery.

The good news is, we are already starting to see this being addressed. As part of the National Health Service care capacity model, the government, industry and armed forces has delivered over 1.16 billion pieces of personal protective equipment (PPE) to our frontline workers. Under the leadership of Lord Deighton, the government is looking to improve domestic manufacturing capability by unleashing the potential of British industry to manufacture PPE.

Currently, the government is in contact with over 200 potential U.K. manufacturers and has already taken delivery of products from new certified U.K. companies. We should use this approach as an example to kickstart a positive trend among industries.

IP is a Driver for Innovation

IP including copyrights, patent systems, trademarks, and designs will contribute strongly to economic growth and innovation and has a vital role in growing the U.K.’s manufacturing economy post-Covid. The use of IP rights has increased in importance over the years due to the rise of the knowledge economy, and the protection of IP is key in the manufacturing sector as it allows the processes and products to be distinguished from that of others.

To aid a meaningful recovery, the U.K. government should consider what role they play in reducing the IP price gap to allow businesses to build and rely upon a British supply chain, in turn keeping the IP assets in the U.K. If we look at China for example, an IP powerhouse, the reason behind this is that it delivers cost effectively. China has the opportunity and the infrastructure in place to develop and protect innovative ways of manufacturing that drive down unit cost. Whilst the U.K. will never compete with China on labor costs—and nor should it—we can preserve a competitive advantage through better protection of our businesses’ intellectual property.

Accelerating New Tech Infrastructure

Covid-19 has changed the way we live and work almost overnight. Consumer behavior and spending have shifted beyond recognition, which has also had a profound impact on the emerging technologies landscape.

Covid-19 has done more for digital transformation than any government scheme or investment program. Businesses must capitalize upon this momentum and ensure it is not only their consumer facing “front end” that updates; their operations—including manufacturing methods and means—must also keep pace. Another factor that is key to the U.K.’s restoration will be the government’s ongoing commitment to superfast broadband and 5G development. We already know that 5G is on the horizon, a network that provides faster download and upload speeds, wider coverage and more stable connections. However, this next stage of technological development will impact and transform the way we live in the future too, including transport and retail.

For manufacturers, competitiveness is key and much-needed gains in efficiency and profitability will have to be achieved through new process innovations. This includes, for example, the continued development of AI. 5G will play a vital part in enhancing and enabling these advances in manufacturing and allows for an exciting future when it comes to R&D and innovation.

As we look to the future, it is evident that investing in building these strong communication networks, in particular next-generation wireless networks or 5G, will be as crucial than ever to the success of the U.K. in a post coronavirus world. But the partners we choose to collaborate with on these vital projects must be sustainable and show a commitment to the U.K. economy. This is a journey that will underpin the next economic cycle for all of us.

It is extremely encouraging to see the government starting to get the ball rolling by recently committing to increase U.K. investment in R&D to 2.4% of GPD by 2027, and to increase public funding for R&D to 22 billion pounds per year by 2024 to 2025. This will allow the U.K. to make major strides towards this goal in closing the productivity gap and embracing the transformative potential of new technologies to improve the quality of life.

Incentive is the Best Motivator

Most importantly, businesses will need the freedom to continue to commit to their R&D projects—not just the big new products but all ongoing development. Therefore, the continued access to tax credits will be vital as long as businesses reinvest gains into future prosperity.

Currently in the U.K., companies that spend money developing new products, processes or services, or on updating existing ones, are eligible for R&D tax relief. This scheme needs to be better targeted and better publicized to encourage organizations to invest in valuable R&D projects, innovation and IP. As part of this, the government needs to be clear that the Covid-19 support packages are there to help people navigate through the crisis, and future tax plays must be there to help us rebuild stronger.

The government’s “leveling up” agenda has a key role to play here, as well over half (61%) of tax claims are seen by companies registered in London, the South East and East of England. However, The North of England has a diverse and powerful economy, with the region long recognized for its strong manufacturing and industrial sectors. Indeed, in the third quarter of last year, the North West accounted for 345,000 manufacturing jobs across the U.K.

The “leveling up” proposition was created to tackle the North/South divide, but making the R&D tax mechanism more generous for companies doing the work in the North needs to be a significant priority if the government is going to incentivize a greater level of innovation outside the South.

GovGrant works with innovators, risk-takers and entrepreneurs every day—helping them to work with HM Revenue & Customs and the tax system as a quick, efficient, established and sector–agnostic way of funding all innovation in businesses across the country.

Luke Hamm is CEO of GovGrant, U.K.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners

To read more articles log in. To learn more about a subscription click here.