Yesterday I made the case for urgent action to boost our export performance. One of the ideas we have developed through discussions with businesses across the country is a new tax credit to reduce the costs of entering a new market.
Exploring a new market takes time and money: finding distributors, navigating regulation, establishing logistics etc. This is expensive and risky for business. If these initial challenges and costs can be overcome, the benefits accrue to the UK economy (and exchequer revenue) as well as the business itself. A tax relief could help share the costs and risks of entering new markets, encouraging ongoing trade expansion by British business and helping to embed an export culture.
This is not a new idea. It has been championed by many organisations including the Small Business Taskforce, CBI, Forum of Private Business, Institute of Directors, HSBC and ICAEW. Now is the time to test it.
If you like detail, I have set out below some thoughts below on how it could work. If you prefer the big picture, wait for my next blog on how businesses can help each other to export. Either way, let me know what you think.
Here's the detail....
Potential uptake and impact: Our work with clients at Grant Thornton indicates that the biggest hurdle to expanding international trade is in the initial work involved in entering a new market: researching, finding distributors, navigating regulation, establishing logistics etc. Our clients regularly cite issues such as “finding the right partners and distributors” and “getting knowledge and understanding of the market”. These findings are consistent across experienced exporters and clients who have yet to export.
A corporation tax relief for the cost of exploring new markets could have a significant impact in focusing firms on export markets. In a survey of medium sized businesses we conducted in 2014 a third of respondents agreed, saying that they would be more likely to consider exporting to a new emerging market such as China or India if the exploratory costs qualified for an export tax credit. In a separate survey in 2013, HSBC found 75% of SMEs that are considering exporting, would be further encouraged to do so if there were fiscal incentives.
International examples: A number of the UK’s international competitors offer tax credits to companies that explore foreign markets. In France, small companies can qualify for a tax credit of 50% of their prospecting costs for exporting. Another example is the US state of Michigan’s State Trade and Export Promotion (STEP) programme, which helped 130 companies connect with 62 new markets, increasing the state’s exports by more than $21 million in the second half of 2012 alone, from an initial Government investment of $1.5m. This was achieved by rebating companies up to $25,000 of funding tied to trade missions, marketing research and other export-related activities.
Why a tax credit? The UK government does not provide similar support. While first-time exporters can access the Tradeshow Access Programme (TAP), for example, this is not the case for those seeking to expand their global presence. Moreover, grant funding is not effective at securing additional spend for those already convinced by the benefits of exporting. This requires an underwriting of risk, which a credit can provide and would be complemented by the UK Export Finance offerings when deals have been secured after prospecting has taken place.
We know that establishing a presence in a new international market is not a quick process. In a 2016 Grant Thornton survey of the UK food and drink industry, businesses typically identified a period of around 3 years as the length of time it takes from identifying a new market to establishing a profitable presence there. A tax credit can provide flexible support over this lengthy period.
‘Export Vouchers’ could provide an alternative to a tax credit, giving businesses a government voucher which can be redeemed against certain services and with approved service providers. This could build on the Department for International Trade (DIT) pilot in recent years.
The experience of R&D tax credits suggest that tax credits possibly have greater potential to support high levels of uptake and transform business attitudes. Tax credits can more easily:
•avoid bureaucratic process of vouchers – application is part of annual tax returns
•allow companies to react more quickly to opportunities, being retrospectively claimed•allow greater flexibility and breadth of activities
•create a more direct connection with the Finance Director and business strategy, helping to hardwire this into the business
•provide flexible options for businesses – tax credits give businesses the option to underwrite risk in activities they conduct themselves, invest in their own internal export capability or commission external support
•provides a ‘nudge’ for all businesses filing taxes to think about exporting to new markets in the coming year
•incentivise greater activity by being directly proportionate to the qualifying activity: a tax credit underpins an element of a company making its own spend and thus if they spend more they will get a greater credit; and as it only underpins an element of the spend it is shared risk/reward. This may reduce risks of deadweight.
What could be eligible? We cannot, and should not, contravene WTO rules on export subsidies. However, we believe there is scope for a tax credit, like the R&D tax credit, for those initial set-up costs in emerging markets. Whether a tax credit or a voucher, the incentive should be payable against a range of exploration activities. It should be easy to use, well publicised and with minimal bureaucratic hurdles that will deter businesses, whilst establishing clear procedures in place to avoid misuse.
Expenditure that might be eligible could include:
•Costs of researching a new market (e.g. in-market product testing, market research and travel)
•Repackaging / labelling requirements
•Cost of trade fairs
•Legal costs of distribution agreements
•Regulatory testing for local standards
•Tax and customs advice
•Intellectual Property advice
It may be possible to develop a prescribed list of qualifying expenses and/or an agreed percentage thereof, to avoid any residual analysis or subjective views. In addition, it may also be possible to develop an advance clearance process for the first 12 months and ongoing for the smallest businesses (similar to HMRC’s Advance Assurance for R&D tax credit).
Who should be eligible? Eligibility criteria should be based on the R&D tax credit, using the R&D tax credit definition of an SME: a company or organisation with fewer than 500 employees and either of the following:
•an annual turnover not exceeding €100 million; or
•a balance sheet not exceeding €86 million.
Potential costs: Based on a high take-up, CBI has estimated that a tax credit aimed at a restricted range of activity (such as trade show expenses only) at a return of 25% would cost £50 million a year. At the upper limit, a credit that returns 50% of costs to a much wider range of activities would cost approximately £200 million.
Potential benefits: Exports stood at 27% of GDP in the UK in 2015, the latest year for which we have data. This compares to 30% in France and 47% on Germany. Research by CEBR for Grant Thornton has indicated that increasing UK exports to 45% of GDP over 10 years (assuming exports’ share of GDP gradually increases) could produce GDP gains of £25bn in five years, rising to £84bn in ten years.
In goods and services, exports account for less than 10% of turnover for more than half of UK exporters; and fewer than a quarter export more than half of their turnover. There is huge potential for existing exporters to export more and for the 27% of SMEs who export only to the EU to expand to other markets. In the coming years, as the UK builds new relationships with the EU and the rest of the world, our SMEs and mid-market businesses will face ever greater competition from their counterparts in Asia, the Americas, Africa and Europe.