Rishi Sunak's Super Deductions Are Not So Super After All

Was the Budget a missed opportunity to bolster the UK's dominant services sector?

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Was the Budget a missed opportunity to bolster the UK's dominant services sector?


Rishi Sunak's Super Deductions Are Not So Super After All

Was the Budget a missed opportunity to bolster the UK's dominant services sector?

Share this article

Over that last few days, I’ve been digesting what the budget means for our business, our clients, who are self-employed professionals, and their clients. It’s clear, given the 8% drop in GDP, there was an intention to stimulate economic growth with this Budget.

That is good news for any self-starter who wants to work with the ambitious scale ups and multinationals Britain is home to.

Amongst the initiatives was the news that the government was introducing the ‘Super-deduction’, which will allow companies to cut their tax bill by up to 25p for every £1 they invest. To quote the guidance, it ensures ‘the UK capital allowances regime is amongst the world’s most competitive.’

My ears pricked up at this. Tax relief for spending on investment couldn’t have been better timed. Investing in growth is on our timetable post-covid. However, disappointment set in when I realised it's only for spending on plant and machinery. If you are a high-tech business like ours, then you don’t qualify.

Quite simply, it would have been a game-changer for our strategy if it had been allowed. We would have gone on an investment spending spree.

The omission is very perplexing at a time when the future of how, where and when we work is changing. The pandemic has brought into sharp focus the choices people and companies have ahead of them, in terms of office locations and flexible working hours, and the roles that are important to society at large.

The delivery ‘gig economy’ is now buoyant, to the extent that the UK is recognised as having one of the most flexible labour markets in the world. Even before the pandemic, research by the University of Hertfordshire showed that the sector doubled between 2014-19.

That sort of growth would not have been possible without the high-tech development of applications that facilitate customer transactions and talk to the supply chain.

In addition, knowledge workers have proven that productivity can still be sustained without an office so long as you have fast reliable broadband and secure access to the applications to do your job.

In terms of scale, the Office for National Statistics (ONS) said in April 2020 46.6% of people in employment did some work at home and 86% of those did so because of the pandemic.

I agree, it might not be good for the soul to be thrown into working from home with the kids in tow, but those figures, and my own experience of mobilising a team to work from home, tell me that if well-planned it can bring great gains.

I’m not alone and know people who are seriously evaluating where they want to live, not where they work as it’s become irrelevant.

It’s also evident that the services sector has kept the engine running over the last 12 months. The latest ONS bulletin shows services was the main contributor to growth in December, far outstripping manufacturing’s contribution to growth and also in contrast to construction, a sector noted to have acted as a ‘drag’ on growth.

In 2019, the service industries accounted for 80% of total UK economic output and services accounted for 82% of employment in July-September 2020. The contribution companies like ours makes to the UK’s $2.38 trillion GDP is huge to say the least.

So why ignore it? As a service business, we treat service spend as a first-class citizen. We ensure we're investing in growing our balance sheet through service spend, as well as simple spending to do business.

This means when I look across my organisation, I can clearly see whether our spending on services is related to capital or revenue. We're used to tracking this and it brings us many benefits - as a CEO I keep a keen eye on how our spend on services impacts our balance sheet or profit and loss.

When the financial instrument FR102 was introduced it gave us the breakthrough to capitalise intangible assets with confidence and support our R&D tax claims.

But if Super-deductions included the investment of everything from artificial intelligence to software development it would have catapulted us further, and I’m sure many other businesses and start-ups in Fintech, legal tech, health tech would have gained too.

Making significant investments in services to build new software features is not for the faint hearted. You have to work at it for a long time and undertake change programmes on the premise that in the long-term you will strengthen the balance sheet and pave the way for future growth.

A super-deduction for service spending would have encouraged us to be even more ambitious. And I’m certain it would have translated into spending more of our reserves with other small businesses and created jobs. But alas, it's not meant to be.

For me, restricting the terms to plant and machinery hints how out of touch, at times, HMT can be with our economy. The numbers show that the UK's GDP is reliant on services. Our place on the map for fintech won’t happen by accident - why else would the government be opening up post Brexit visas for fintech skill?

I can only assume that part of their rationale will be to mitigate potential fraud, given the levels we’ve seen over the pandemic related to the bounce back loan. After all, it’s easy for HMRC to audit if someone's bought a press machine.

It's less straightforward to audit intangible assets. Machinery is also perhaps considered by the government as a very visible sign of growth – buy equipment employ people to run it.

Yet, as we’ve already discussed, services companies employ huge swathes of people and will continue to as traditional working models are reviewed and the development and use of technology becomes more prolific.

So, I can’t help but think that if we do want to continue to be a services powerhouse, HMRC/HMT needs to work harder to ensure there are checks and balances in place to ensure that such risks don't stand in the way of business investment.

It must be possible to create financial instruments that protect the interests of the economy yet propel the interests of innovation and service leadership.

I’d wager, there are plenty of experts out there who would be willing to consult on how to make it work, many of whom want to scale their business to the next level of growth.

James Poyser is CEO of inniAccounts.

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Rishi Sunak's Super Deductions Are Not So Super After All

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