Is now the time for export tax credits to help businesses expand internationally?
We surveyed 530 businesses across the UK to explore attitudes and barriers to growth.
The findings are published in a report called Going for Growth.
Whilst businesses are have seen impressive growth over the past three years – 60% of businesses surveyed reported growth of over 25% over the past three years – much of that growth has come from within the UK.
In fact, our research showed that a third (32%) of UK private businesses generate between 50-100% of their revenues from their immediate geographic location, with 18% considered hyper-local generating between 75-100% of their revenue locally.
Our survey also reports that with Brexit looming large, the UK will continue to remain the single most important market for UK businesses with 56% believing their immediate geographic location is the most attractive market for future growth. Perhaps more worrying, some 35% of businesses have no international aspirations at all.
It appears that despite the best efforts of our politicians, the measures in place to encourage businesses to grow through international markets are just not working. It is time for some radical thinking.
One answer could be the introduction of a new tax credit that would help reduce the cost of entering overseas markets.
Exploring a new market takes time and money. Finding distributors, navigating regulations, establishing logistics and finding new customers can be expensive and risky. If these challenges and costs can be successfully overcome, then benefits will naturally accrue to the UK economy and exchequer revenues. A tax relief that helps share these costs would benefit businesses wishing to grow internationally.
How might that tax credit work?
There are three existing models the Government could follow – the R&D tax credit route, a voucher system, or the Patent Box model.
Patent Box, which offers businesses a lower rate or corporation tax on revenues generated through intellectual property registered via Patent Box has, in practice, proved to be complex. There were also state aid issues. Its take-up has been limited and this option may therefore not help businesses grow and expand overseas.
A voucher system, where the government contributes to certain services or which can be spent with approved service providers, is another alternative. Vouchers would effectively provide businesses with match-funding to attend, for example, international trade missions or conferences, and on specific services such as localised web support. This requires administration on licencing providers and auditing the outcome.
A preferred approach might be one modelled on R&D tax credits. Our experience of R&D tax credits suggests a high level of government support with a dedicated team at HMRC to oversee the regime, wide take-up, and the ability to really change the way businesses think and work.
Tax credits can more easily:
- Avoid a complex process for voucher administration with application as part of annual tax returns;
- Ensure companies react more quickly to opportunities as credits would be retrospectively claimed;
- Provide greater flexibility for businesses;
- Give businesses the option to underwrite risk in activities they conduct themselves;
- Provide a ‘nudge’ for all businesses filing taxes to think about exporting to new markets in the coming year; and
- Incentivize greater activity through being directly proportionate to the qualifying activity.
It would require the Government to define, as it has done with R&D tax credits, what is qualifying activity, and would need to ensure that such a credit does not contravene WTO rules on export subsidies.
It is a route adopted by other EU countries, most notably France, and in a more complex way by some US states. The idea is also not entirely new. HSBC and the Institute of Chartered Accountants for England and Wales both mooted the idea back in 2016.
But has we fast approach Brexit and look to strike a new role in world business, perhaps now is the time to revisit an export tax credit regime. Our survey suggests it is. We endorse this.
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